Strap Option Strategy

What are the characteristics of this option strategy?

The Strap Option Strategy, is a powerful yet potentially risky options trading strategy. It involves buying or selling three ATM option contracts consisting of one put and two calls with same expiration dates. This strategy can be used to take advantage of higher volatility – either bullish or bearish.

Is this a bullish, bearish or neutral strategy?

Strategy can be used to take advantage of either bullish or bearish market conditions.

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 can have a high probability of profit, but it requires high upfront payment. The trader will have to pay more in commissions and fees, and loose all of it 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 the effects of time decay, 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?

This strategy is typically most optimal when volatility is high, indicating huge upmove in either direction. However higher volatility increases the upfront premium to be paid to execute the strategy.

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?

This strategy can be used to generate income, but it is important to note that because this strategy involves trading multiple options, it carries a high degree of risk.

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 options will be $886 considering lot size of 100. If the MSFT share moves above $290 or below $275, unlimited profits can be made. Profits will be higher when stock moves upwards due to 2 call options ending in the money. However if the price doesn’t change, the trader can lose the entire upfront payment of $886.

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 the perfect tool for trading options and helps to minimize risk while maximizing reward.

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