Tim Olson
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description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A bullish volatility strategy buying two ATM calls and one ATM put at strike K, profiting more from an upward move than a downward move of equal magnitude. |
|
Strap
Section: 2.34 | Asset Class: Options | Type: Volatility
Overview
The strap is a volatility strategy consisting of a long position in two ATM call options and a long position in one ATM put option with strike K. This is a net debit trade. The trader's outlook is bullish (skewed toward upside). This is a capital gain strategy that profits from a large move in either direction but gains more from an upward move.
Construction
- Buy 2 ATM call options at strike K
- Buy 1 ATM put option at strike K, same expiry
Net debit: D
Payoff Profile
f_T = 2 × (S_T - K)+ + (K - S_T)+ - D
- Upper breakeven: S*_up = K + D/2
- Lower breakeven: S*_down = K - D
- Max profit: P_max = unlimited (especially strong on upside due to 2 calls)
- Max loss: L_max = D (if S_T = K at expiry)
Key Conditions / Signals
- Bullish but uncertain of direction; expects a large move with upside bias
- Low implied volatility environment is ideal (cheaper debit to enter)
- The upper breakeven (D/2 above K) is closer to K than the lower breakeven (D below K)
Notes
The strap is a modified straddle with bullish skew: two calls vs. one put. The upside potential is doubled relative to the downside (per unit of move). Maximum loss is capped at the net debit D.