The strip option strategy is a trading strategy in the share market that involves trading options contracts to profit from the directional movement of an underlying asset. It is a bearish strategy that is used when a trader expects a significant price drop in the underlying asset.

The strategy is called a strip because it involves buying a put option, selling two call options, and is similar to the straddle and strangle options strategies. The difference between the strip and the straddle/strangle is that in the strip, the trader sells two call options instead of buying them, making it a bearish strategy.

How the strip option strategy works:

• Buy a Put Option: The trader buys a put option for a particular underlying asset, such as a stock, index, or commodity. A put option gives the trader the right to sell the underlying asset at a fixed price, known as the strike price before the option expires.

• Sell Two Call Options: The trader sells two call options for the same underlying asset with the same expiration date and a higher strike price than the put option. A call option gives the trader the right to buy the underlying asset at a fixed price, known as the strike price before the option expires.

The combination of buying the put option and selling two call options creates a strip, as the trader is simultaneously betting on the price of the underlying asset going down and betting against the price of the underlying asset going up.

The profit potential of the strip option strategy is limited, as the trader is selling two call options. However, this also reduces the overall cost of the trade, making it a more affordable strategy for traders with limited funds.

The maximum profit potential of the strip option strategy is achieved when the price of the underlying asset drops significantly. If the price of the underlying asset remains above the strike price of the sold call options, the trader can keep the premium received from selling the call options and let the put option expire valueless.

The maximum loss potential of the strip option strategy is limited to the cost of the put option. If the underlying asset's price rises above the put option's strike price, the trader can let the put option expire worthlessly and keep the premium received from selling the call options. However, suppose the price of the underlying asset drops below the strike price of the put option. In that case, the trader can exercise the put option to sell the underlying asset at the higher strike price and minimize their losses.

Conclusion

The strip option strategy is a bearish trading strategy used by traders to profit from a significant price drop in the underlying asset. It involves buying a put option and selling two call options, creating a strip, and limiting the profit potential while reducing the overall cost of the trade. Traders should carefully consider the potential risks and rewards of this strategy before implementing it in the share market.