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Strap-Neutral Strategy

Options-Trading-Beginners

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.

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    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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