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The strap strategy is a modified and bullish version of the straddle strategy. It involves buying more At-the-money calls and lesser puts.
We need to make sure that both the calls and puts should be of the same underlying stock, strike price and expiration date.
We conduct a strap strategy by:
1. Buy 2 Call AT-THE-MONEY (ATM)
2. Buy 1 Puts AT-THE-MONEY (ATM)
We use this strategy when we expect volatility to increase in the near future and market direction to be on the bullish side. Large profit is attainable with the strap strategy when the underlying stock price makes a strong move either upwards or downwards at expiration, but gains are made faster and larger if the movement of the underlying is on the upside. The risk is limited to the net premium paid for the position and the maximum profit is unlimited.
The most important thing for all these strategies, i.e. Straddle, Strangle, Strip and Strap is Volatility. The market has to make big moves in order for these strategies to make money for you.
Example: Strap strategy
Maximum Profit : Unlimited
Maximum Loss : Limited to the net Premium Paid = 300
Upper Break-even Point = Strike price + (net premium paid/2) = 6000 + (300/2) = 6150
Lower Break-even Point = Strike price - net premium paid = 6000 - 300 = 5700