An option combination strategy that involves the purchase of out-of-the-money calls and the sale of out-of-the-money puts, whereby the net cost of the strategy is zero, i.e. the cost of buying the calls is equal to the revenue from selling the puts. When a call option’s strike price is above the forward rate or a put option’s strike price is below the forward rate, the option is said to be out-of-the-money, that is, it lacks intrinsic value. Therefore, if the spot rate ends up at the current level of the forward rate, the option will not be exercised, i.e. it will expire worthless.
January 23, 2023