In options trading, the viability of combinations creates profitable chances in various circumstances. Properly chosen option combinations offer appropriate profit potential regardless of whether the underlying stock prices increase, decrease, or remain unchanged. One such options strategies are Strip Options Strategy.
A “strip” is just a long straddle strategy with minor modifications. On the other hand, the Strip is a “bearish” market-neutral strategy that offers twice the profit potential on downward price movement compared to equivalent upward price movement.
Thus making straddles the “perfect” market-neutral strategy that offers equal profit potential on either side of underlying price movement (a “strap,” in contrast, is a bullish market-neutral strategy).
So, in today’s blog, let us discuss options trading with Strips Options Strategy:
What is Strip Options Strategy?
The Strip Option Strategy has a strong bearish bias and opts for a volatile market. The Strip is a net debit approach that is a little bit modified from the Long Straddle. With this small tweak, we are long on Put with one more lot as we have a bearish bias. In the long strap, we are long on ATM Call and Put option with equal lots.
How does it work?
Let us discuss how to implement the strip options strategy:
Strip Option Strategy should be used when traders anticipate a very turbulent market in the foreseeable future or when they are bullish on volatility. It is a neutral to negative strategy. The market should move sharply in either direction rather than for the stock price to soar.
The Strip can be used by purchasing One lot of an ATM call option, and two lots of an ATM put option, both with the same underlying stock and expiration, are available. However, it is more expensive than a Long Straddle and necessitates an immediate market explosion, especially on the downside.
You can also read our blog on 12 Common Option Trading Strategies Every Trader Should Know
3. Maximum loss\risk
When the underlying price closes at the Strike Price of the Call and Put purchased, the Maximum Loss under Strip will occur. ATM options will expire worthless, costing traders the premium for both the Call and Put options they purchased. Net Premium Paid Max Loss
When the underlying exhibits a substantial move at expiration, either upwards or downwards, a significant profit can be made; profitability increases twice as quickly on the downside. The maximum profit is undefined in the theatre.
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5. Breakeven stock price at expiration
There will be two Breakeven in this Strip Strategy like in Long Straddle.
- Upper Breakeven = Strike Price + Net Premium Paid.
- Lower Breakeven = Strike Price – (Net Premium Paid/2)
6. Payoff Diagram
Below is the payoff diagram of this strategy
You can practice more such strategies in ElearnOptions
With a Neutral to Bearish attitude, one can take part in an increase in volatility either way, preferable on the negative. Trading Strip is best done when IV are at the lower end. Advantageous when option prices are lower and predicted to rise rapidly with a tilt toward the negative. Loss is defined in this method as net premium paid.
Strip Strategy is harmed by theta decay. In the final week before expiration, time decay increases dramatically. Because establishing a Strip Strategy is expensive. One may lose the premium if the stock does not move in the intended direction.
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