InvestorQ : What are straps in options trading?
Ria Roy made post

What are straps in options trading?

Answer
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Mahil Khan answered.
2 years ago


Straps are a form of a straddle but this is a straddle with little more bullishness on the stock than bearishness. Let us recollect what is a 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 Strap what you do is to buy 2 lots of the ATM call and just 1 lot of the ATM put. While you are still betting on the volatility of the stock, you are betting more on the upside than on the downside. Check the live case below of a trader who created a Strap on RIL buy purchasing 1 lot put and 2 lots of call at strike Rs.1100. Here is the chart.

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

RIL Put Strike

RIL CMP

Put Premium

Put MTM

ITM/OTM

Put P / L

RIL Call Strike

RIL CMP

Call Premium

Call MTM

ITM/OTM

Call P / L

P/L for 2 call lots

Total Profit

1100

800

-28

300

ITM

272

1100

800

-45

0

OTM

-45

-90

182

1100

820

-28

280

ITM

252

1100

820

-45

0

OTM

-45

-90

162

1100

840

-28

260

ITM

232

1100

840

-45

0

OTM

-45

-90

142

1100

860

-28

240

ITM

212

1100

860

-45

0

OTM

-45

-90

122

1100

880

-28

220

ITM

192

1100

880

-45

0

OTM

-45

-90

102

1100

900

-28

200

ITM

172

1100

900

-45

0

OTM

-45

-90

82

1100

920

-28

180

ITM

152

1100

920

-45

0

OTM

-45

-90

62

1100

940

-28

160

ITM

132

1100

940

-45

0

OTM

-45

-90

42

1100

960

-28

140

ITM

112

1100

960

-45

0

OTM

-45

-90

22

1100

980

-28

120

ITM

92

1100

980

-45

0

OTM

-45

-90

2

1100

1000

-28

100

ITM

72

1100

1000

-45

0

OTM

-45

-90

-18

1100

1020

-28

80

ITM

52

1100

1020

-45

0

OTM

-45

-90

-38

1100

1040

-28

60

ITM

32

1100

1040

-45

0

OTM

-45

-90

-58

1100

1060

-28

40

ITM

12

1100

1060

-45

0

OTM

-45

-90

-78

1100

1080

-28

20

ITM

-8

1100

1080

-45

0

OTM

-45

-90

-98

1100

1100

-28

0

ATM

-28

1100

1100

-45

0

ATM

-45

-90

-118

1100

1120

-28

0

OTM

-28

1100

1120

-45

20

ITM

-25

-50

-78

1100

1140

-28

0

OTM

-28

1100

1140

-45

40

ITM

-5

-10

-38

1100

1160

-28

0

OTM

-28

1100

1160

-45

60

ITM

15

30

2

1100

1180

-28

0

OTM

-28

1100

1180

-45

80

ITM

35

70

42

1100

1200

-28

0

OTM

-28

1100

1200

-45

100

ITM

55

110

82

1100

1220

-28

0

OTM

-28

1100

1220

-45

120

ITM

75

150

122

1100

1240

-28

0

OTM

-28

1100

1240

-45

140

ITM

95

190

162

1100

1260

-28

0

OTM

-28

1100

1260

-45

160

ITM

115

230

202

1100

1280

-28

0

OTM

-28

1100

1280

-45

180

ITM

135

270

242

1100

1300

-28

0

OTM

-28

1100

1300

-45

200

ITM

155

310

282

1100

1320

-28

0

OTM

-28

1100

1320

-45

220

ITM

175

350

322

1100

1340

-28

0

OTM

-28

1100

1340

-45

240

ITM

195

390

362

1100

1360

-28

0

OTM

-28

1100

1360

-45

260

ITM

215

430

402

1100

1380

-28

0

OTM

-28

1100

1380

-45

280

ITM

235

470

442

1100

1400

-28

0

OTM

-28

1100

1400

-45

300

ITM

255

510

482

In the above table, the pink shaded portions represent the payoffs of the single put and the double call. AS you can see, the maximum loss of Rs.118 (2 calls at Rs.45 and 1 put at Rs.28) arises at the strike price of Rs.1100. As you can see in the above table, the profits on the upside are growing much faster as he bought 2 calls against each put. This works very well when the volatility has an upward bias as you are able to leverage more on the upside than on the downside. This is a long strap. In case you are creating a short strap by selling the put and the calls then you need to be extra careful as your losses on the upside can multiply very fast.