The strap straddle falls into the category of an options trading strategy for a volatile market, it's designed to return a profit when the price of a security makes a substantial move. Unlike most similar strategies, which are typically designed to be used when you cannot determine which direction the price of the security will move in, this one is specifically for you: This is essentially a modified long straddle where instead of buying an equal amount of call options and put options you buy a higher amount of calls.
We have provided details of this strategy below, but we would advise that you only study this strategy if you are already familiar with the long straddle. If you aren't, then please take a look at this page first. As we have mentioned above, the strap straddle is designed specifically to be used when you have a volatile outlook with a bullish inclination. This means that you should use it if your expectation is that the underlying security will make a significant price movement in either direction, with an upward price movement being the most likely direction.
It can return a profit from either direction, but the profits will be greater if the underlying security does indeed go up substantially. Just like the long straddle, the strap straddle also requires you to buy at the money calls and at the money puts, with the same expiration date. However, you need to buy more calls than puts. You'll need to decide what ratio of calls to puts you use; we would advise a 2 to 1 ratio when you start using this strategy and then making any adjustments depending on the circumstances and your outlook.
We have provided an example of using the strap straddle below, including what the results would be based on different price movements in the underlying security. Rather than using exact market data, we have used hypothetical options prices, to keep things simple. For the same reason, we haven't included commission charges.
Although the strap straddle is a little more complicated than the basic long straddle and other similar strategies such as the long strangle and the long gut , if you are confident that an upward price movement is more likely than a downward price movement, then it will usually be a strategy well worth considering.
It's suitable strategy for beginners, because there are only two transactions and no margin requirements. Strap Straddle The strap straddle falls into the category of an options trading strategy for a volatile market, it's designed to return a profit when the price of a security makes a substantial move.
Section Contents Quick Links. Example of the Strap Straddle We have provided an example of using the strap straddle below, including what the results would be based on different price movements in the underlying security. You also think that an upward movement is most likely. This is Leg A. This is Leg B. You will have broken even, as the value of the calls is equal to the initial investment. Read Review Visit Broker.More...