Strip and Strap

Strip

A strip is a delta negative trading strategy. Being delta negative implies that the value of the strip position increases when the price of the underlying security goes down.

A strip is constructed by adding an extra put leg to a long straddle. So, it consists of two at the money put options and one at the money call option.

Table of Contents
  1. Strip
  2. Strap

The buyer of a strip has to pay a cost premium upfront, but he expects the market to make a move in one direction before the expiry. He expects the probability of a down move to be more than that of an up move.

The risk to reward a strip is beneficial to the long trader if a strong move happens. The maximum loss is limited to the premium paid upfront, while the maximum profit is unlimited.

The profit of a strip at various underlying market prices can be shown as below:

Strip

Strap

As opposed to a strip, a strap is a delta-positive trading strategy. The strategy pays off more if the market moves in the upwards direction.

A strap can be constructed by adding an extra call leg to a normal straddle position. So, it consists of one at the money put option and two at the money call options. As with a strip, the buyer of a strap also has to pay an upfront premium. But he can expect a high upside if the underlying price increases before expiry. The strap buyer envisages a higher probability of the market moving upwards.

Strip and Strap

As with a strip, the risk to reward a strap is beneficial to the long trader if a strong move happens. The behavior of loss and profit is also similar to that of a strip, albeit the maximum profit occurs if the market moves up, as opposed to a strip where it happens if the market moves down. The profit of a strap at various underlying market prices can be shown below:

Strap


Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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