InvestorQ : Is an Option Strip the same as an option strap?
Ria Roy made post

Is an Option Strip the same as an option strap?

Answer
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Mahil Khan answered.
2 years ago


Strips are slightly different from straps in their composition. While a strap buys 1 put and 2 calls, the strip buys 1 call and 2 puts. This is also a modified version of the straddle. In a straddle you buy 1 lot of ATM call and 1 lot of ATM put and you are profitable once the stock goes outside the break even range. In a Strip what you do is to buy 2 lots of the ATM put and just 1 lot of the ATM call. While you are still betting on the volatility of the stock, you are betting more on the downside of the stock than on the upside. Check the live case below of a trader who created a Strap on RIL buy purchasing 1 lot call and 2 lots of puts at strike Rs.1100 on Reliance Industries. Here is the chart.

Buy 2 lot Reliance 1100 Put Option at Rs.28 each and 1 lot of Reliance 1100 Call Option at Rs.45

RIL Put Strike

RIL CMP

Put Premium

Put MTM

ITM/OTM

Put P / L

P/L for 2 Puts

RIL Call Strike

RIL CMP

Call Premium

Call MTM

ITM/OTM

Call P / L

Total Profit

1100

800

-28

300

ITM

272

544

1100

800

-45

0

OTM

-45

499

1100

820

-28

280

ITM

252

504

1100

820

-45

0

OTM

-45

459

1100

840

-28

260

ITM

232

464

1100

840

-45

0

OTM

-45

419

1100

860

-28

240

ITM

212

424

1100

860

-45

0

OTM

-45

379

1100

880

-28

220

ITM

192

384

1100

880

-45

0

OTM

-45

339

1100

900

-28

200

ITM

172

344

1100

900

-45

0

OTM

-45

299

1100

920

-28

180

ITM

152

304

1100

920

-45

0

OTM

-45

259

1100

940

-28

160

ITM

132

264

1100

940

-45

0

OTM

-45

219

1100

960

-28

140

ITM

112

224

1100

960

-45

0

OTM

-45

179

1100

980

-28

120

ITM

92

184

1100

980

-45

0

OTM

-45

139

1100

1000

-28

100

ITM

72

144

1100

1000

-45

0

OTM

-45

99

1100

1020

-28

80

ITM

52

104

1100

1020

-45

0

OTM

-45

59

1100

1040

-28

60

ITM

32

64

1100

1040

-45

0

OTM

-45

19

1100

1060

-28

40

ITM

12

24

1100

1060

-45

0

OTM

-45

-21

1100

1080

-28

20

ITM

-8

-16

1100

1080

-45

0

OTM

-45

-61

1100

1100

-28

0

ATM

-28

-56

1100

1100

-45

0

ATM

-45

-101

1100

1120

-28

0

OTM

-28

-56

1100

1120

-45

20

ITM

-25

-81

1100

1140

-28

0

OTM

-28

-56

1100

1140

-45

40

ITM

-5

-61

1100

1160

-28

0

OTM

-28

-56

1100

1160

-45

60

ITM

15

-41

1100

1180

-28

0

OTM

-28

-56

1100

1180

-45

80

ITM

35

-21

1100

1200

-28

0

OTM

-28

-56

1100

1200

-45

100

ITM

55

-1

1100

1220

-28

0

OTM

-28

-56

1100

1220

-45

120

ITM

75

19

1100

1240

-28

0

OTM

-28

-56

1100

1240

-45

140

ITM

95

39

1100

1260

-28

0

OTM

-28

-56

1100

1260

-45

160

ITM

115

59

1100

1280

-28

0

OTM

-28

-56

1100

1280

-45

180

ITM

135

79

1100

1300

-28

0

OTM

-28

-56

1100

1300

-45

200

ITM

155

99

1100

1320

-28

0

OTM

-28

-56

1100

1320

-45

220

ITM

175

119

1100

1340

-28

0

OTM

-28

-56

1100

1340

-45

240

ITM

195

139

1100

1360

-28

0

OTM

-28

-56

1100

1360

-45

260

ITM

215

159

1100

1380

-28

0

OTM

-28

-56

1100

1380

-45

280

ITM

235

179

1100

1400

-28

0

OTM

-28

-56

1100

1400

-45

300

ITM

255

199

In the above table, the pink shaded portions represent the payoffs of the single call and the double put. As you can see, the maximum loss of Rs.101 (2 puts at Rs.28 each and 1 call at Rs.45) arises at the strike price of Rs.1100. As you can see in the above table, the profits on the downside are growing much faster as he bought 2 puts against each call. That was the basic idea of the Strip anyways as you wanted to make a volatile strategy with focus on the downside more than the upside. This works very well when the volatility has a downward bias as you are able to leverage more on the downside than on the upside. This is a long Strip. In case you are creating a short Strip by selling the put and the calls then you need to be extra careful as your losses on the downside can multiply very fast. Play short strips accordingly with due stop losses or hedges only.