Strap option. Main Differences Between Short Strap Straddle and Regular Short Straddle


Unlimited Profit Potential

In buying a second call, the strap option retains its preference for high volatility but now with a more bullish slant. As with the Straddle, we choose the ATM strike for both legs, which means the strategy is expensive.

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We are therefore requiring a pretty big move, preferably with the stock soaring upwards. As such, our risk is greater than with the Straddle, and our reward is still uncapped. Because we bought double the number of calls, our position improves at double the speed, so the breakeven to the upside is slightly tighter.

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Remember that time decay hurts long options positions because options are like wasting assets. The closer we get to expiration, the less time value there is in the option. Time decay accelerates exponentially during the last month before expiration, so we dont want to hold onto OTM or ATM options into the last month.

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  3. 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.
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  5. I highly recommend to trade with discount brokers to reduce the overhead cost of trading.
  6. 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.
  7. Updated May 28, What Is a Strap?

Use the Straddle rules but buy twice as many calls as puts in order to make an adjustment for the Strap. Its very easy to find reasons to exit, even though its in breach of your trading plan. But you must remember that you got in for a certain reason or reasonsand you must stay in until one of your other reasons compels you to exit.

Choose your preferred stock price range. Only do a Strap on a stock that is close to making an announcement, such as the week before an earnings report.

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Buy ATM calls and puts with the expiration at least two months away, prefer- ably three. You can get away with four months if nothing else is available.

Construction of Strap:

The cost of the Straddle should be less than half of the stocks recent high less its recent low. By recent, we mean the last 40 trading days for a two-month Straddle, the last 60 trading days for a three-month Straddle, or the last 80 days for a four-month Straddle. The point here is that the cost of the Straddle should be low in comparison with the potential of the stock to move. If this works with the Straddle, then the Strap can be strap option.

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Exit within two weeks after the news event occurs. Never hold into the final month before expiration. Try to find a stock that is forming a consolidation strap option, such as a flag or pennant, or in other words where the stock price action has become tighter and where volatility has shrunk in advance of a big move in either direction.

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