A trader wants to construct a long strip by using the stock options from the table below. The current price of the underlying stock is $30.40. Strike Price Option Class Option Premium $30 Call $4.20 Put $0.90) Call $1.10 $40 Put $3.90 (a) Describe how a long strip can be constructed from the available options and complete a table showing the profit/loss (P&L) generated from this strategy. What are the breakeven points and the maximum loss possible?
(b) Construct a diagram showing the P&L (as a function of the terminal stock price) of the strategy. Show on the same diagram the P&L of each individual component/option too.
(c) Discuss the market profile that would make this strategy profitable (in terms of volatility and direction). Is this a highly risky strategy? Explain your answer.