Options Trading Strategies: Strip
The strip is a three-legged strategy, created by buying one At The Money call and two At The Money puts, all with the same strike price and an expiration date. You can also buy more calls and twice more puts to form this position.
When to use this strategy?
You are neutral to bearish, and bullish on volatility, so you expect a drastic move in the underlying price, but more on the downside. Also, you can use this strategy to extend the long straddle and make it more on the bearish side.
Below is a Profit and Loss chart example of a strip 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 call and puts. You need drastic movement of the BTC/ETH price to make a profit.
Example:
In this example, BTC is trading at 43,501.70 USD and you expect its price to move in either direction. You have bought an ATM call and two ATM puts, all with the strike price of 43,000.00 USD, with the expiration date of February 10th 2022.
As this is a net debit spread you have paid a net premium of 1,489.53 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 call will expire worthless and the two puts 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 the puts and the call 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 puts will expire worthless and the call is 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) |
|---|---|
| 40,137.00 | +4,236.47 |
| 41,505.00 | +1,500.47 |
| 42,255.24 (break even 1) | 0 |
| 42,567.00 | -623.53 |
| 43,000.00 (LC & 2xLP ATM) | -1,489.53 (max loss) |
| 43,661.00 | -828.53 |
| 44,489.53 (break even 2) | 0 |
| 44,960.00 | +450.47 |
| 46,491.00 | +1,500.47 |