What are the characteristics of this option strategy?
Strap positions buy three at the money contracts on the same underlying and the same expiration, two calls and one put. That two to one weighting makes it a long volatility trade with an upward lean: it pays on a large move in either direction, but it gains about twice as fast on the way up as on an equal move down. The cost of all three contracts is paid up front and is the most that can be lost.
Is this a bullish, bearish or neutral strategy?
The strap profits from a large move either way, so it is not directional in the ordinary sense, but the two calls against one put give it a bullish tilt. Net delta at entry is positive, and the payoff is steeper above the strike than below it. Use it when a big move is expected and, if forced to pick, the more likely direction is up.
Is this a beginner or an advanced option strategy?
This is an advanced option strategy and it should not be used by beginners as it involves a large degree of risk.
In what situation will I use this strategy?
This strategy is typically used when a trader is expecting a large move in the underlying stock or index, but uncertain of which direction the move may take.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The strap option strategy has a low probability of profit but an uncapped payoff on the upside: the underlying must move well past the breakevens before the position pays, and the full premium is lost if it sits near the strike at expiration. The trader will also pay more in commissions and fees, on top of a premium that is lost in full if the trade does not go as planned.
How is this strategy affected by the greeks?
The greeks will affect this strategy in the same way that they affect any options strategy. The delta, gamma, theta and vega will all play a role in how the strategy performs. The delta will show the sensitivity of the price of the strategy to movement in the price of the underlying stock or index, the gamma will show how quickly the strategy's delta changes as the underlying moves, theta will show the effects of time decay, and vega will show the sensitivities of the Strategy’s price to changes in the implied volatility.
In what volatility regime (i.e VIX level) would this strategy be optimal?
The strap needs a large realised move, but buying it when implied volatility is already elevated means paying up for that move in advance, which pushes both breakevens further away. The better entry is when implied volatility is low relative to the move actually expected, for instance ahead of a catalyst the market has not yet priced. Buying three contracts into an already expensive volatility regime is the most common way this trade loses money even when the direction is right.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting this strategy when the trade goes against you can be difficult, due to the fact that it involves trading multiple option contracts. It is also worth noting that when adjusting the strategy, the trader must be aware of any changes in the greeks which might affect the price of the strategy.
Where does this strategy typically fall in the range of commissions and fees?
Due to the fact that this strategy involves trading multiple options contracts, the commissions and fees associated with the strategy will likely be higher than with other option strategies. However, the specific commission and fee rates depend on the broker being used.
Is this a good option income strategy?
No. A strap is a net debit paid up front, so there is no credit to collect and time decay runs against the position every day the underlying stands still. It is a way to buy exposure to a large move, not a way to draw regular income.
How do I know when to exit this strategy?
The best way to know when to exit this strategy is to closely monitor the market conditions and the greek sensitivities. Generally, when the market conditions and/or the greeks start to shift in a way that indicates the likelihood of profit for the strategy is waning, it is best to exit the trade.
How will market makers respond to this trade being opened?
Market makers typically try to take a neutral stance when responding to trades that are opened, and will try to match the buyer and seller of options. However, they will adjust their prices as they see fit in order to remain profitable.
What is an example (with calculations) of this strategy?
Let’s say you expect a large move in MSFT share currently trading at $285, but are undecided as to which direction the move could take. You decide to use the strap option strategy, so you buy two call option contracts with a strike price of $285 and one put option contracts with a strike price of $285, each with same expiration date.
The cost of options are as follows:
Call Option 1: $3.45
Call Option 2: $3.45
Put Option 1: $1.96
The total cost of all three contracts is $8.86 per share, or $886 at a lot size of 100, and that $886 is the entire risk on the trade.
The two breakevens are not the same distance from the strike, because two calls recover the debit twice as fast as one put. On the upside the two calls need to gain $8.86 between them, so the breakeven is $285 plus $4.43, or $289.43. On the downside the single put has to cover the whole debit, so the breakeven is $285 minus $8.86, or $276.14. Above $289.43 the profit is uncapped and grows at $200 per point. Below $276.14 the profit grows at only $100 per point and it is bounded, because MSFT cannot fall below zero: the best the downside can do is $276.14 per share, or $27,614 on the position. In between the two breakevens the trade loses, and the worst case is MSFT finishing exactly at $285, where all three contracts expire worthless and the full $886 is gone.
How MarketXLS can help?
MarketXLS is the ultimate spreadsheet for options trading. It provides powerful templates for options trading strategies, such as the Straddle Options Strategy or the Strip Options Strategy. It provides easy-to-use tools for calculating the greeks and analyzing the risk and reward of each trade. MarketXLS also provides tools for analyzing the price of each strategy in different volatility regimes, such as the Vix. MarketXLS is a useful tool for options work because it lets you see the breakevens and the maximum loss of a position before you put it on.
Here are some templates that you can use to create your own models
Strap Straddle
Strap Strangle
Strip Strangle
Strip Straddle
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
Understand What a Strangle in Options Is
Strap Straddle Options Strategy (Using MarketXLS Template)
Strap Strangle Options Strategy (Using MarketXLS Template)
Strip Straddle Options Strategy (Using MarketXLS Template)
Unlocking the Secrets of Historical Options Data