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Options Strategy – Strip


A Strip is an options trading strategy that involves buying one call option and two put options with the same strike price and expiration date on the same underlying asset. This strategy is used when a trader expects high volatility and believes that the price of the underlying asset is more likely to decrease than increase. The goal is to profit from a significant price movement, particularly a downward move.

  • Difficulty: Expert

How It Works

  1. Buy a Call Option: The trader buys one call option with a specific strike price.
  2. Buy Two Put Options: The trader buys two put options with the same strike price and expiration date.
  3. Market Movement: The trader profits if the underlying asset’s price moves significantly, especially if it decreases.
  4. Profit and Loss: The maximum loss is limited to the total premiums paid for the options. The potential profit is unlimited on the downside and substantial on the upside.

Example of a Strip Strategy

Let’s say you expect a major price movement in Company XYZ, currently trading at $100, due to an upcoming earnings announcement, but you believe the movement is more likely to be downward. You decide to implement a Strip with the following specifics:

  • Buy Call Option: Strike Price $100, Premium Paid $5 per share
  • Buy Two Put Options: Strike Price $100, Premium Paid $5 per share (per put)
  • Expiration Date: 1 month from now

You trade one call option and two put options contracts, each representing 100 shares. Your total investment (premium paid) is:

100 shares × ($5+2×$5) = $1,500100 shares x ($5 + 2x $5) = $1,500100 shares×($5+2×$5)= $1,500

Scenarios

  1. Stock Price Rises Significantly Above $100
    If, at expiration, the stock price rises to $120:
    • Call Option Profit: $120 (market price) – $100 (strike price) = $20 per share.
    • Put Options Loss: $5 (premium paid per put) x 2.
    • Net Loss: $1,500 (total premiums paid) – $2,000 (call profit) = $500.
  2. Stock Price Falls Significantly Below $100
    If, at expiration, the stock price falls to $80:
    • Call Option Loss: $5 (premium paid).
    • Put Options Profit: $100 (strike price) – $80 (market price) = $20 per share x 2.
    • Net Profit: ($20 x 200 shares) – $1,500 (total premiums) = $4,000 – $1,500 = $2,500.
  3. Stock Price Remains Near $100
    If, at expiration, the stock price remains at $100:
    • All Options Expire Worthless: Total loss is the premiums paid.
    • Net Loss: $1,500 (total premiums).

Benefits of Strip Strategy

  • Profit from Volatility: Can profit significantly from large price movements, especially downward.
  • Directional Bias: Ideal for situations where the market is expected to be volatile with a bias towards a price decrease.

Risks of Strip Strategy

  • Limited to Premiums Paid: Maximum loss is limited to the total premiums paid for the options if the price remains stable.
  • Higher Cost: Requires a substantial initial investment in premiums due to purchasing three options.

The Strip strategy is an effective way to profit from high market volatility with a bearish bias.

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