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

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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