Short Strap Straddle

How does a Short Strap Straddle work in Options Trading?

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Short Strap Straddle - Introduction

The Short Strap Straddle, also known simply as a Short Strap, is a Short straddle which writes more call options than put options and has a bearish inclination.

As a Neutral Options Strategy, Short Strap Straddles are useful when a stock with a neutral outlook is assessed to have a higher chance of breaking out to downside than upside. Short Strap Straddles transfers some of the upside risk to downside, creating an asymmetric risk graph that makes a lower loss if the stock breaks to downside than upside.

Short Strap Straddles also make a higher maximum profit than a regular short straddle due to the fact that the minimum amount of short options are more than a regular short straddle.

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Main Differences Between Short Strap Straddle and Regular Short Straddle

The main difference between the Short Strap Straddle and the regular short straddle is that short Straps writes more call options than put options. A regular short straddle writes the same number of at the money put options and call options and has a symmetrical risk graph with equal loss to upside and downside. Short Strap Straddles writes more at the money call options than put options, resulting in a risk graph with steeper loss to upside than downside. Short Strap Straddles would also have a farther downside breakeven point than upside as there are more call options to overcome the premium gain of the lesser put options.

Short Strip Straddle Versus Regular Short Straddle Example Assuming QQQQ trading at $43.00. Regular Short Straddle Sell To Open 1 contract of Jan $43 Call at $1.80 Sell To Open 1 contract of Jan $43 Put at $1.63. Net Credit = $1.80 + $1.63 = $3.43 Short Strap Straddle Sell To Open 2 contracts of Jan $43 Call at $1.80 Sell To Open 1 contracts of Jan $43 Put at $1.63. Net Credit = ( 2 x 1.80) + 1.63 = $5.23

The regular short straddle can also be given a bullish inclination through writing more put options than call options, creating a Short Strip Straddle. Short Strip and Short Strap are the two variants of the Short straddle that options traders can use to introduce a bearish or bullish inclination.

When To Use Short Strap Straddle?

One should use a Short Strap Straddle when one speculates that a stock would go sideways but if it breaks out, it will most probably to downside.

How To Use Short Strap Straddle?

Sell to Open 2 x At The Money (ATM) Call Options and Sell to Open At The Money (ATM) Put options.

Short Strip Straddle Versus Regular Short Straddle Example Assuming QQQQ trading at $43.00. Short Strap Straddle Sell To Open 2 contracts of Jan $43 Call at $1.80 Sell To Open 1 contracts of Jan $43 Put at $1.63. Net Credit = ( 2 x 1.80) + 1.63 = $5.23

Trading Level Required For Short Strap Straddle

A Level 5 options trading account that allows the writing of naked options is needed for the Short Strap Straddle. Read more about Options Account Trading Levels.

Profit Potential of Short Strap Straddle :

Short Strap Straddles make their maximum profit when the stock closes at the strike price of the options upon expiration.

Profit Calculation of Short Strap Straddle:

Maximum Profit = Net Credit

Maximum Loss = Unlimited as long as the stock keep rising or falling.

From the above example : Maximum Profit = $5.23

Risk / Reward of Short Strap Straddle:

Upside Maximum Profit: Limited

Maximum Loss: Unlimited

Breakeven Points of Short Strap Straddle:

A Short Strap Straddle makes a profit if the stock stays between its upper breakeven point and lower breakeven point.

Upper Breakeven Point = Strike price + (net credit/[number of call options/number of put options])

Lower Breakeven Point = Strike price - net credit

From the above example : Upper Breakeven Point: 43 + (5.23/[2/1]) = 43 + 2.615 = $45.61 Lower Breakeven Point: 43 - 5.23 = $37.77 You would notice at this point that a Short Strip Straddle has a closer upper breakeven point than its lower breakeven point. This is the effect of writing more call options than put options. This allows the Short Strap Straddle to remain in profit longer if the stock go down, hence giving it a bearish inclination.

Advantages Of Short Strap Straddle:

Higher profit than a regular short straddle.

Farther lower breakeven point.

Disadvantages Of Short Strap Straddle:

Higher margin requirement than a regular short straddle since more options are written.

Higher maximum loss than a regular short straddle.

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