Options Trading Strategies: Neutral - Strap Strategy

Explanation

Strap Strategy is similar to Long Straddle, the only difference is the quantity traded. A trader will buy two Call Options and one Put Options. In this strategy, a trader is very bullish on the market and volatility on upside but wants to hedge himself in case the stock doesn’t perform as per his expectations. This strategy will make more profits compared to long straddle since he has bought 2 calls.

Risk: Limited

Reward: Unlimited

Construction

Buy 2 ATM Call Options
Buy 1 ATM Put Option

Example

Mr. X is bullish on NIFTY and enters in a Strap Strategy. He buys two 5200 NIFTY ATM Call Options at a premium of Rs. 100 and simultaneously buys one 5200 ATM Put Option at a premium of Rs. 85. His net investment will be Rs. 14250 [{(100*2) + (85)}*50]

Case 1: At expiry if NIFTY closes at 4900, then Mr. X will make a profit of Rs. 750. [{(300-85) + (0-200)}*50]

Case 2: At expiry if NIFTY closes at 5200, then Mr. X will make a loss of Rs. 14250 (Entire investment amount). [{(0-200) + (0-85)}*50]

Case 3: At expiry if NIFTY closes at 5400, then Mr. X will make a profit of Rs. 5750. [{((200-100)*2)-(85)}*50]

Payoff Chart