« Long Strip - A Great Bear Market Strategy [Part 1] »

Over the weekend, we'd mentioned that we were going to provide a series of short educational articles this week, covering the Long Strip options strategy.

We'll start off the series with an illustration.

The Russell-2000 iShares (IWM) are trading at 35.00 at the moment. The fact that the ETF is sitting nearly precisely at a widely traded strike (as well as the fact that IWM options are amongst the most liquid options overall) means that this would not be a bad point at which to consider a strategy such as a Strip.

The technicals are as important of course and since this is not an educational piece on technical analysis per se, let's just say that the technicals basically point to the probability of a continuing bearish environment on the ETF for the next few sessions, but with the potential for a huge dead cat bounce, at any point. As we'll see later in the series, the Long Strip strategy would do well given either a continued drop or an abrupt bullish reversal.

The MAR 35.00 Strip on IWM will consist of ONE Long MAR 35.00 Call and TWO Long MAR 35.00 Puts in every Strip. The Calls and the Puts are each trading at nearly precisely 1.50 at this point, which is convenient since it gives us nice round numbers to play with.

The Net Debit of the Long MAR 35.00 Strip is 4.50; that is the amount you get when you add the cost of the Call (1.50) and the cost of the Puts (2x1.50).

A hypothetical p/l diagram of this strategy and a snapshot of the stock chart, have been provided below. Don't get too caught up in the details, at the moment. We'll go more in-depth as the series continues; for now just try and get a lay of the land, so to speak. 

Have a good trading day.

Cheers,

Asher Pinto

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Other articles in this series:

Long Strip - A Great Bear Market Strategy [Intro]

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