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Strap Option Strategy

Strap Option Strategy

What is Strap Option Strategy?

  • The Strap Option Strategy is a highly volatile strategy with bullish biasness. The Strap is a slightly modified version of Long Straddle strategy, and this is a net debit strategy. In other words, In Long Straddle we are long on ATM Call and Put option with equal lots, here slight modification is we are long on call with one extra lot as we have bullish biasness.

When to Execute?

  • Strap Option Strategy is neutral to Bullish strategy, it should be implemented when traders are expecting a huge volatile market in near term i.e., they are bullish on Volatility. Market should move violently in either direction, preferable to skyrocketing rather than stock plunging.

What is the Trade?

  • The Strap can be implemented by buying One two of At-the-Money (ATM) Call Option and one lot of At-the-Money Put Option of same underlying stock and expiration. It is expensive as compared to Long Straddle and it also demands that the market should be explosive in the near term, especially upside.

What will be maximum profit?

  • Huge profit can be earned in Strap when underlying shows strong move either upside or downside at expiration, Profitability improves at double the speed on upside. Maximum profit is theatrically undefined.

What will be maximum loss?

  • Maximum Loss under Strap will occur when the underlying price closes at Strike Price of Call and Put bought. ATM options will expire worthless and as a trader we will lose premium for both Call and Put options bought. Max Loss = Net Premium Paid

What are the advantages?

  • With a Neutral to Bullish outlook in Strap Strategy, one can participate in either way surge in volatility preferably volatility on upside. Ideal time to trade Strap is when IV are the lower end. Beneficial when option prices are lower and expected to increase exponentially with bias on upside. Under this strategy loss is defined as net premium paid.

What are the disadvantages?

  • Theta Decay is harmful to Strap Strategy. Time decay accelerates exponentially in the last week of expiry. As the cost to establish Strap Strategy is significantly high. If stock fails to give desired move, one can lose the premium.

Example of Strap:

  • Nifty future price is 15500. A Strap can be devised by Adding two lot of 15500 CE @ 165 and buying one lots of 15500 PE at Rs. 170. Net Premium Paid = Rs.500. Undefined profit potential if stock moves above or below the upper or lower breakeven i.e., 15750 and 15000. Max Loss if underlying closes at 15500.