Strap Straddle

How Does The Strap Straddle Strategy Work in Options Trading?

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Strap Straddle - Introduction

The Strap Straddle, also known simply as a Strap, is a long straddle which buys more call options than put options and has a bullish inclination.

As a Volatile Options Strategy, Strap straddles are useful when the direction of a breakout is uncertain but is inclined to upside. Strap straddles can also be used to balance straddles into delta neutral positions. Strap straddles make a higher profit than a regular straddle when the underlying stock breaks upwards but will make a lesser profit than a regular straddle when the underlying stock breaks downwards.

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Main Differences Between Strap Straddle and Regular Long Straddle

The main difference between the Strap Straddle and the regular long straddle is that Straps buys more call options than put options. A regular long straddle buys the same number of at the money put options and call options and has a symmetrical risk graph with equal profit to upside and downside. Strap straddles buy more at the money call options than put options, resulting in a risk graph with steeper gains to upside than downside. Strap straddles would also have a farther downside breakeven point than upside as the lesser put options need to overcome the premium cost of more call options.

The other purpose of using a Strap straddle is when there are no exactly at the money options available. If the strike price of the nearest the money options is higher than the current price of the underlying stock, buying the same amount of call options and put options at the nearest strike price would incline the position to downside. This means that the position makes money more readily to downside than upside as the put options would be in the money. In this case, as the straddle has a negative overall delta value, more call options can be bought to bring the overall delta of the position back down to zero or near zero. This results in a delta neutral position which profits both ways.

Strap Straddle Versus Regular Straddle Example Assuming QQQQ trading at $42.57. Assuming Jan $43 Put has delta value of -0.75 and Jan $43 Call has delta value of 0.35. Regular Long Straddle Buy To Open 1 contract of Jan $43 Put at $2.38 Buy To Open 1 contract of Jan $43 Call at $1.63. Net Debit = 2.38 + 1.63 = $4.01 Overall Delta = 0.35 - 0.75 = -0.4 Strap Straddle Buy To Open 1 contract of Jan $43 Put at $2.38 Buy To Open 2 contracts of Jan $43 Call at $1.63. Net Debit = 2.38 + (1.63 x 2) = $5.64 Overall Delta = (0.35 x 2) - 0.75 = 0.05

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

When To Use Strap Straddle?

One should use a Strap Straddle when one speculates that an uncertain stock might breakout to upside or to create a delta neutral straddle position .

How To Use Strap Straddle?

Buy to Open more At The Money (ATM) Call Options and Buy to Open At The Money (ATM) Put options.

How much more call options to buy for a Strap Straddle depends on your purpose of using the Strap Straddle. If you are putting on a Strap straddle in order to bias the position to an upwards breakout, you should buy enough call options such that the total delta value of the call options is twice that of the put options. If you are merely trying to create a totally delta neutral straddle position, you should buy enough call options to make the overall position delta of the Strap Straddle zero or closest to zero.

Strap Straddle Example Assuming QQQQ trading at $42.57. Buy To Open 1 contract of Jan $43 Put at $2.38 Buy To Open 2 contracts of Jan $43 Call at $1.63. Net Debit = 2.38 + (1.63 x 2) = $5.64

Trading Level Required For Strap Straddle

A Level 2 options trading account that allows the buying of call and put options is needed for the Strap Straddle. Read more about Options Account Trading Levels.

Profit Potential of Strap Straddle :

Strap Straddles have unlimited profit potential as long as the stock continues moving in one direction.

Profit Calculation of Strap Straddle:

Profit = [(Stock price - strike price of Strap straddle) x number of call options (if stock is higher) or number of put options (if stock is lower)] - net debit

Maximum Loss = Net debit when stock closes at the options strike price.

From the above example : Assuming QQQQ Rallies To $56 Profit = [(56 - 43) x 2] - 5.64 = 26 - 5.64 = $20.36 or 361% Maximum Loss = $5.64

Risk / Reward of Strap Straddle:

Upside Maximum Profit: Unlimited

Maximum Loss: Limited

Breakeven Points of Strap Straddle:

A Strap Straddle makes a profit if it goes above its upper breakeven point or below its lower breakeven point.

Lower Breakeven Point = Strike price - net debit

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

From the above example : Lower Breakeven Point: 43 - 5.64 = $37.36 Upper Breakeven Point: 43 + (5.64/[2/1]) = 43 + 2.82 = $45.82 You would notice at this point that a Strap straddle has a nearer upper breakeven point than its lower breakeven point. This is the effect of buying more call options than put options.

Advantages Of Strap Straddle:

:: Higher profit than a regular straddle if stock breaks out to upside.

:: Closer upper breakeven point.

Disadvantages Of Strap Straddle:

:: Higher minimal cash outlay needed.

:: Higher maximum loss than a regular straddle.

Alternate Actions for Strap Straddles Before Expiration :

1. If the underlying asset has rallies and is expected to continue rising, you could sell to close the put Options and hold the long call Options.

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