Strap strategy is a slightly modified version of a Straddle.
While straddles are completely market neutral, Straps are neutral with a bullish bias.
When to use this strategy?
This strategy is used when the investor expects high volatility in the short term, with a bullish bias.
How to build this strategy?
This strategy has two legs:
Leg 1 – Buy 2 ATM Calls
Leg 2 – Buy 1 ATM Put
Credit Spread/Debit Spread
This is a Debit Spread strategy.
This strategy has unlimited profit potential.
When is this strategy profitable?
The investor stands to make unlimited profits if the price of the underlying security at expiry either rises sharply above the strike price of the call options purchased or falls sharply below the strike price of the put option purchased.
The investor makes greater gains when the price moves upwards.
The investor faces limited risk in this strategy.
When is this strategy unprofitable?
The investor faces losses if the price of the underlying security neither rises nor falls.