What Is a Strip?

A strip is a bond coupon that has been removed from the bond so🍸 that the two parts can be sold separately, as an interest-paying coupon bond and as a zero-coupon bond. This process is handled by the bro𓆏kerage or other financial institution that sells the products.

A strip is also referred to as a stripped bond or a z-bond.

In options, a strip is a strategy💟 that i🍌nvolves being long in one call position and two put options, all with the same strike price, in order to alleviate the potential loss.

Strip Explained

Strips in the Bond Market

Most bonds come with the promise that interest will be paid t🥃o its owners in a series of payments, usually monthly, until the bonds reach maturity. The principal is then returned to the investor.

The inter𒉰est payments are known as the coupon because they once were pieces of paper that the investor would𒈔 take to the bank when a payment was due.

The strip process separates the interest from the bond itself. The bond becomes a zero-coupon bond to be sold൩ separately at a discount to its face value. The buyer cashes it in for face value when it matures. The difference in price is the profit.

When Strips are STRIPS

STRIPS is an acronym for Separate Trading of Registered Interest and Principal of Securities. A U.S. 澳洲幸运5开奖号码历史查询:Treasury bond is stripped by the commercial book-entry system in a process that effectively makes the interest payment and principal payment separate entities. The result is known as a 澳洲幸运5开奖号码历史查询:strip bond or a zero-coupon bond.

Example of a Strip Bond

The U.S. Treasury issues 澳洲幸运5开奖号码历史查询:Treasury notes that have semi-annual interest payments and mature in 10 years. The STRIPS process produces 21 se🧔parate debt securities, including 20 strip bonds and one zero-coupon bond.

The minimum investment in a stripped fixed-principle note or Treasury security is $100. Any par amount above $100 has to be stripped in denominations of $100. These types of stripped bonds are attractive to investors saving save for retir♕ement or seeking a fixed payment investment. The risk of these types of investment vehicles is extremely low.

Strips as an Options Strategy

An investor conducts a strip strategy by purchasing two 澳洲幸运5开奖号码历史查询:put options and one 澳洲幸运5开奖号码历史查询:call option on a single underlying stock.

The investor who adopts this strategy be🔯lie💎ves that the underlying price of the stock will plummet in the near-term future.

All three of the options will have the same expiration date and the same 澳洲幸运5开奖号码历史查询:exercise price. If the investor is correct and the price drastically decreases, the puts will pay out substantially. If the investor is wrong and the price of the underlying asset increase𓄧s, the call option w🤪ill mitigate the loss.