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Strip Option Strategy

Strip Option Strategy

What is Strip Option Strategy?

  • The Strip Option Strategy is a highly volatile strategy with bearish biasness.The Strip 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 Put with one extra lot as we have bearish biasness.

When to Execute?

  • Strip Option Strategy is neutral to bearish 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 plunge rather than stock skyrocketing.

What is the Trade?

  • The Strip can be implemented by buying One lot of At-the-Money (ATM) Call Option and two lots 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 downside.

Break-Even Point for Strip

  • There will be two breakeven in this Strip Strategy like we have in Long Straddle. Upper Breakeven = Strike Price + Net Premium Paid. Lower Breakeven = Strike Price – (Net Premium Paid/2)

What will be maximum profit?

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

What will be maximum loss?

  • Maximum Loss under Strip 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 Bearish outlook in Strip Strategy, one can participate in either way surge in volatility preferably volatility on downside. Ideal time to trade Strip is when IV are the lower end. Beneficial when option prices are lower and expected to increase exponentially with bias on downside. Under this strategy loss is defined as net premium paid.

What are the disadvantages?

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

Example of Strip:

  • Nifty future price is 15500. A Strip can be devised by Adding one lot of 15500 CE @ 165 and Buying Two lots of 15500 PE at Rs. 170. Net Premium Paid = Rs.505. Undefined profit potential if stock moves above or below the upper or lower breakeven i.e. 16005.00 and 15247.00. Max Loss if underlying closes at 15500.