Options Trading Strategies: Strap
The strap is a three-legged strategy, created by buying two At The Money calls and one At The Money put, all with the same strike price and an expiration date. You can also buy more puts and twice more calls to form this position.
When to use this strategy?
You are neutral to bullish, and bullish on volatility, so you expect a drastic move in the underlying price, but more on the upside. Also, same as the strip strategy which extends the long straddle on the bearish side, you can use a strap and make it more on the bullish side.
Below is a Profit and Loss chart example of a strap options strategy:
Pros:
Capped maximum loss. Uncapped maximum profit potential. Potential of big profit if the volatility is high.
Cons:
Expensive as you have to pay upfront to buy both the ATM calls and a put. You need drastic movement of the BTC/ETH price to make a profit.
Example:
In this example, BTC is trading at 43,427.15 USD and you expect its price to move dramatically in either direction. You have bought two ATM calls and one ATM put, all with the strike price of 43,000.00 USD, with the expiration date of February 11th 2022.
As this is a net debit spread you have paid a net premium of 2,429.80 USD which is also your maximum loss.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is below the strike price the ATM calls will expire worthless and the put will be exercised. You are in the profit as long as the bitcoin price ends up below the first break-even point.
If the BTC price is at the strike price, both calls and the put will expire worthless, and you are at your maximum loss which is equal to the net premium paid.
If the BTC price is above strike price, the put will expire worthless and the calls will be exercised. You are in the profit as long as the bitcoin price ends up above the second break-even point.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 39,605.00 | +965.72 |
| 40,203.00 | +367.72 |
| 40,510.42 (break even 1) | 0 |
| 41,833.00 | -1,262.28 |
| 43,000.00 (2xLC & LP ATM) | -2,429.80 (max loss) |
| 43,680.00 | -1,069.28 |
| 44,214.64 (break even 2) | 0 |
| 44,814.00 | +1,198.72 |
| 46,353.00 | +4,276.72 |