This strategy amounts to buying an ATM put option and selling an ATM call option with a strike price K = S0. This can be a Net Debit or net credit trade. Typically, |H| ≪ S0. The trader’s outlook is bearish: this strategy mimics a short Stock or futures position; it replicates a short forward contract with the delivery price K and the same maturity as the options. This is a capital gain strategy. We have:

fT = (K − ST )⁺ − (ST − K)⁺ − H = K − ST − H

S∗ = K − H

Pmax = K − H

Lmax = unlimited

Disclaimer: A call option is a right (but not an obligation) to buy a stock at the maturity time T for the strike price k agreed on at time t = 0.

The claim for the call option 

fcall(ST , k) = (ST − k)⁺                                    Here (x)⁺ = x

if x > 0 and (x)⁺ = 0 if x ≤ 0.

If the stock price at maturity ST > k, then the option holder gains ST − k (excluding the cost paid for the option at t = 0). If the price at maturity ST ≤ k, then there is no profit to be made from the option as it makes no sense to exercise it if ST  ST)⁺.

 

Time-to-maturity = (TTM)

ATM = at-the-money

ITM = in-the-money

OTM = out-of-the-money

fT is the payoff at maturity T

S0 is the stock price at the time t = 0 of entering the trade (i.e., establishing the initial position)

ST is the stock price at maturity

C is the net credit received at t = 0

D is the net debit required at t = 0

H = D (for a net debit trade)

H = −C (for a net credit trade)

S∗up and S∗down are the higher and lower break-even (i.e., for which fT = 0) stock prices at maturity

If there is only one break-even price, it is denoted by S∗

Pmax is the maximum profit at maturity

Lmax is the maximum loss at maturity.