Explanation
A strap is a bullish option trading strategy similar to a long straddle, the only difference between a strap and long straddle is that the trader purchases two call options instead of one.A trader executes this strategy when he/she is very bullish on the market and volatility with bias primarily toward the upside. At the same time the trader want to gain from the downside if the primary assumption doesn’t take off as per the expectation. This option strategy will be more profitable as compared to long straddle since the strategy execute 2 call options.
This strap strategy entails purchasing one at-the-money (ATM) put and two at-the-money (ATM) calls of the same underlying asset, expiration date, and strike. Straps are costly because the consumer must pay a premium upfront.To breakeven in the strap strategy, the stock price must rise sufficiently to cover the cost of three long options.Straps are options trading strategies with infinite reward withlimited risk but significant, equivalent to the premium and commissions paid for purchasing call and put options.
Profit potential
Maximum profit could be achieved if the underlying makes a volatile move in the upside direction.
Loss potential
Maximum loss would be equal to the net premium paid.
Construction
Buy 2 ATM Call Options
Buy1 ATM Put Option
| Option Type | Expiry Date | Strike Price | LTP | Action | No. Of Lots |
| CALL | 27/04/2023 | 17750.0 | 79.6 | Buy | 2 |
| PUT | 27/04/2023 | 17750.0 | 36.45 | Buy | 1 |
| Max Risk | Max Reward | Lower Break Even | Upper Break Even |
| 195.65 | Unlimited | 17554.35 | 17847.824 |
| Market Expiry | Payoff 1 | Payoff 2 | Net Premium | Option PayOff At Expiry |
| 17350.0 | 0.0 | 400.0 | -195.65 | 204.35 |
| 17400.0 | 0.0 | 350.0 | -195.65 | 154.35 |
| 17450.0 | 0.0 | 300.0 | -195.65 | 104.35 |
| 17500.0 | 0.0 | 250.0 | -195.65 | 54.35 |
| 17550.0 | 0.0 | 200.0 | -195.65 | 4.35 |
| 17600.0 | 0.0 | 150.0 | -195.65 | -45.65 |
| 17650.0 | 0.0 | 100.0 | -195.65 | -95.65 |
| 17700.0 | 0.0 | 50.0 | -195.65 | -145.65 |
| 17750.0 | 0.0 | 0.0 | -195.65 | -195.65 |
| 17800.0 | 100.0 | 0.0 | -195.65 | -95.65 |
| 17850.0 | 200.0 | 0.0 | -195.65 | 4.35 |
| 17900.0 | 300.0 | 0.0 | -195.65 | 104.35 |
| 17950.0 | 400.0 | 0.0 | -195.65 | 204.35 |
| 18000.0 | 500.0 | 0.0 | -195.65 | 304.35 |
| 18050.0 | 600.0 | 0.0 | -195.65 | 404.35 |
| 18100.0 | 700.0 | 0.0 | -195.65 | 504.35 |
| 18150.0 | 800.0 | 0.0 | -195.65 | 604.35 |
Payoff Chart
Example
As we have already discussed above, this strategy is implemented when the trader is very bullish on the upside with downside protection. The market is trading at 17750 levels and the trader implements a strap trading strategy. Total investment by the trader wil be equal to the net premium paid which is Rs. 9850 ((80*2) + 37) *50
Scenario1:
if at expiry the market becomes volatile but closes in opposite direction as per the trader expectation at 17500. Profit will be made on the long put which is equal to Rs. 2650 ((17750-17500-37) – (80*2))50
Scenario2:
if at expiry market showed little or no volatility trader will lose all the premium paid which is equal to Rs. 9850
Scenario3:
if the market closes perfectly as per the trader expectation on the upside at 17900 levels, the trader would make two times profit which would be equal to Rs. 5150 ((17900-17750-160) – 37)*50.
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