If the trader is bearish on market and bullish in volatility, he will implement this strategy. However the trader can be neutral in nature i.e. indifferent if the market moves in either of the direction, this strategy will make profits, but uptrend will give a capped income than downtrend which will give unlimited returns.
Strap Strategy is similar to Long Straddle, the only difference is the quantity traded. A trader will buy two Call Options and one Put Options. In this strategy, a trader is very bullish on the market and volatility on upside but wants to hedge himself in case the stock doesn’t perform as per his expectations. This strategy will make more profits compared to long straddle sin ..
Profit Achieved When Price of Underlying > Strike Price of Calls/Puts + (Net Premium Paid/2) OR Price of Underlying < Strike Price of Calls/Puts - Net Premium Paid
Risk Profile
Max Loss Occurs When Price of Underlying = Strike Price of Calls/Puts
Breakeven Point
Strike Price of Calls/Puts + (Net Premium Paid/2)
PUT BACKSPREAD Vs STRAP - When & How to use ?
PUT BACKSPREAD
STRAP
Market View
Bearish
Neutral
When to use?
This strategy is used when the investor is bullish on the stock and expects volatility in the near future.
Action
Buy 2 ATM Call Option, Buy 1 ATM Put Option
Breakeven Point
Strike Price of Calls/Puts + (Net Premium Paid/2)
PUT BACKSPREAD Vs STRAP - Risk & Reward
PUT BACKSPREAD
STRAP
Maximum Profit Scenario
UNLIMITED
Maximum Loss Scenario
Net Premium Paid
Risk
Limited
Limited
Reward
Unlimited
Unlimited
PUT BACKSPREAD Vs STRAP - Strategy Pros & Cons
PUT BACKSPREAD
STRAP
Similar Strategies
Strip, Short Put Ladder, Short Call Ladder
Disadvantage
• To generate profit, there should be significant change in share price. • Expensive strategy.
Advantages
• Limited loss. • If share prices are moving then traders can book unlimited profit. • A trader can still book profit if the underlying falls substantially.
