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Option Trading Strategy – Strips and Straps
Strips and straps are two options strategies applied to increase the returns from an investment. Both strips and straps are related to options where market movements are compared with the underlying stock’s prices. As profits can be made from both upward and downward direction of the stock’s value, adding one or more options to increase the profit is the underlying concept in the case of strip and strap option strategies.
Strips mean buying two put options and one call option at the same time where the expiry date, strike price, and the underlying assets are identical. This is also considered as adding one more put option to a straddle.
- Like straddles, strip is also based on the idea of profitability from large price movements of the underlying stocks.
- However, unlike straddle, here, investors are willing to take the risk that the market will move downwards. The risk of taking a stand on market movement offers more profitability when the market actually goes down, offering premiums in excess from the two put options.
Two put options mean that the investor can sell the option at a larger strike price of the underlying in the market. The strike prices being higher than the underlying stock’s prices, a net profit is generated from a strip.
Straps strategy includes buying one more call option to a straddle. That is, there are two call options and a put option in a strap. Adding the call option means investors are bullish about the movement of their underlying stock.
As the investors predict the price of underlying will increase, they buy an extra call option to increase the profitability from the options trading strategy. In case of the strap strategy, the prices of the underlying stocks increase rather than decrease. As the strike price goes up above the underlying’s original cost, the investors can earn large profits from straps in comparison to straddles.
Are these strategies foolproof?
Strip and strap strategies can be rewarding if the price of the stocks in the market move according to the predictions. However, as with any financial instrument, risks are associated with both strip and strap strategies.
Buying two similar options may work well when the predictions are correct but there is no guarantee that the price movements in the market will happen according to predictions. Once the prediction goes wrong, strip and strap strategies may lead to large losses.
Like Straddles, having the awareness of the timing is important in the case of strips and straps too. The investor who wants to earn profits from these strategies should be alert as to when to write the strategies and when to hold them back. Not having the idea of timing can be a costly affair in the case of options trading.
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