Strip Strategy

Purab Kumar -

If you are a trader or investor, you must have heard about the "Strip Strategy." It is a popular options trading strategy that involves the buying and selling of call and put options with different strike prices and expiration dates. The Strip Strategy is a bearish strategy that is used to make a profit when the underlying asset's price falls. In this article, we will discuss the Strip Strategy in detail, including its sub-strategies, examples, and how it works.

What is Strip Strategy?

Strip Strategy is an options trading strategy that is used when a trader expects the underlying asset's price to fall. It involves buying one at-the-money call option and two out-of-the-money put options. The at-the-money call option gives the trader the right to buy the underlying asset at the strike price, while the out-of-the-money put options give the trader the right to sell the underlying asset at the strike price.

Logic Behind this Strategy and when to use it

The Strip Strategy is a bearish options trading strategy that involves buying one at-the-money call option and two out-of-the-money put options. The logic behind this strategy is that the trader expects the underlying asset's price to fall. If the price of the underlying asset falls, the trader can exercise the put options and sell the shares at the strike price, which is higher than the market price. The trader can also let the call option expire as it will not be profitable to exercise the option when the price of the underlying asset is lower than the strike price.

The Strip Strategy is suitable for traders who have a bearish outlook on the underlying asset's price and want to limit their risk. The strategy provides traders with the opportunity to profit from a decline in the underlying asset's price while limiting their potential losses.

The Strip Strategy is best used when the trader expects a significant downward movement in the underlying asset's price. The strategy is not suitable for traders who are uncertain about the underlying asset's direction or expect a small price movement.

In addition to the Strip Strategy, there are two sub-strategies that can be used in different market conditions. The Strap Strategy is a bullish strategy that involves buying two at-the-money call options and one out-of-the-money put option. The Strip Strap Combo is a combination of the Strip and Strap Strategies and is used when a trader is uncertain about the underlying asset's direction but expects a significant price movement.

Sub-strategies in Strip Strategy:

  1. Strap Strategy: The Strap Strategy is a bullish sub-strategy of the Strip Strategy. It is used when a trader expects the underlying asset's price to rise. The Strap Strategy involves buying two at-the-money call options and one out-of-the-money put option. The at-the-money call options give the trader the right to buy the underlying asset at the strike price, while the out-of-the-money put option gives the trader the right to sell the underlying asset at the strike price.

    The maximum profit for the Strap Strategy is unlimited, and the maximum loss is limited to the premium paid for the options. The Strap Strategy is suitable for traders who are bullish on the underlying asset but want to limit their risk.
  2. Strip Strap Combo: The Strip Strap Combo is a combination of the Strip and Strap Strategies. It is used when a trader is uncertain about the underlying asset's direction but expects a significant price movement. The Strip Strap Combo involves buying one at-the-money call option, two out-of-the-money put options, and two at-the-money call options.

    The maximum profit for the Strip Strap Combo is unlimited, and the maximum loss is limited to the premium paid for the options. The Strip Strap Combo is suitable for traders who are unsure about the direction of the underlying asset's price but expect a significant price movement. The strategy provides traders with the ability to profit from either a bullish or bearish move in the underlying asset's price.

Examples:

Assume that you are a trader who believes that the price of Reliance Industries will fall in the coming weeks. You can use the Strip Strategy as follows:

  1. Buy one at-the-money call option with a strike price of INR 2,000 expiring in two months.
  2. Buy two out-of-the-money put options with a strike price of INR 1,800 expiring in two months.

If the price of Reliance Industries falls below INR 1,800 at the time of expiration, the trader can exercise the put options and sell the shares at the strike price. If the price of Reliance Industries remains above INR 2,000 at the time of expiration, the trader can let the call option expire.

Let's consider another example:

Assume that you are a trader who is uncertain about the direction of the price of TCS but expects a significant price movement. You can use the Strip Strap Combo as follows:

  1. Buy one at-the-money call option with a strike price of INR 4,500 expiring in three months.
  2. Buy two out-of-the-money put options with a strike price of INR 4,000 expiring in three months.
  3. Buy two at-the-money call options with a strike price of INR 4,500 expiring in three months.

If the price of TCS falls below INR 4,000 or rises above INR 5,000 at the time of expiration, the trader can exercise the options and make a profit. If the price of TCS remains between INR 4,000 and INR 5,000 at the time of expiration, the trader will lose the premium paid for the options.

Conclusion:

The Strip Strategy is a popular options trading strategy that is used when a trader expects the underlying asset's price to fall. It involves buying one at-the-money call option and two out-of-the-money put options. The Strip Strategy has two sub-strategies, the Strap Strategy and the Strip Strap Combo, which are used in bullish and uncertain market conditions, respectively. It is important to note that options trading involves significant risks and should only be attempted by experienced traders who understand the risks involved.

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