“Strap Options” are among the market-neutral trading strategies with profit potential on either side price movement. “Strap” originated as a slightly modified version of a straddle. A straddle provides equal profit potential on either side of underlying price movement (making it a “perfect” market neutral strategy), while the Strap is a “bullish” market neutral strategy providing double the profit potential on upward price move compared to equivalent downward price move. (Want to know more about what "market neutral" means? See "Getting Results with Market-Neutral Funds.")

Strap Options offer unlimited profit potential on the upward price movement of the underlying security, and limited profit potential on downward price movement. The risk/loss is limited to the total option premium paid (plus brokerage & commission).

(Read about the counterpart strategy: Strip Options: A Market-Neutral Bearish Strategy)


The cost of constructing the strap option position is high, as it requires three options purchases:

  1. Buy 2 ATM (At-The-Money) Call Options
  2. Buy 1 ATM (At-The-Money) Put Option

All three options should be bought on the same underlying, with the same strike price and same expiration date. The underlying can be a option-able security (usually a stock like IBM or an index like DJIA, the Dow Jones Industrial Average) on which the option is defined.

Payoff function with an example:

Assume creating a strap option position on a stock currently trading around $100. Since ATM (At-The-Money) options are bought, the strike price for each option should be nearest available to the underlying price i.e. $100.

Here are the basic payoff functions for each of the three option positions. The overlapping Blue and Pink graphs represent the $100 strike price LONG CALL options (costing $6.5 each). The Yellow graph represents the LONG PUT option (cost $7). We’ll take price (option premiums) into consideration at the last step.

atm call

Now, let’s add all these option positions together, to get the following net payoff function (Turquoise color):

strap option payoff

Finally, let’s take prices into consideration. Total cost will be ($6.5 + $6.5 + $7 = $20). Since all are LONG options i.e. purchases, there is a net debit of $20 for creating this position. Hence, the net payoff function (Turquoise graph) will shift down by $20, giving us the Brown colored net payoff function with prices taken into consideration:

Profit & Risk Scenarios:

There are two profit areas for strap options i.e. where the BROWN payoff function remains above the horizontal axis. In this strap option example, the position will be profitable when the underlying price moves above $110, or drops below $80. These points are known as breakeven points as they are the “profit-loss boundary markers” or “no-profit, no-loss” points.

strap option payoff

In general:

  • Upper Breakeven Point = Strike Price of Call/Puts + (Net Premium Paid/2)

= $100 + ($20/2) = $110, for this example

  • Lower Breakeven Point = Strike Price of Call/Puts - Net Premium Paid

= $100 – $20 = $80, for this example

Profit and Risk Profile of Strap Option:

Beyond the upper breakeven point i.e. on upward price movement of the underlying, the trader has UNLIMITED profit potential as theoretically the price can move to any level upwards offering unlimited profit. For every single price point movement of the underlying, the trader will get two profit points – i.e. one dollar increase in underlying share price will increase the payoff by two dollars.

This is where the bullish outlook for Strap option offers better profit on upside compared to downside and this is where the strap differs from a usual straddle which offers equal profit potential on either side.

Below the lower breakeven point, i.e. on downward price movement of the underlying, the trader has LIMITED profit potential as underlying price cannot go below $0 (worst case bankruptcy scenario). For every single downward price point movement of the underlying, the trader will get one profit point.

Profit in Strap Option in upward direction = 2 x (Price of Underlying - Strike Price of Calls) - Net Premium Paid – Brokerage & Commission

Assuming underlying ends at $140, then profit = 2 *($140 - $100) - $20 – Brokerage

= $60 - Brokerage

Profit in Strap Option in downward direction = Strike Price of Puts - Price of Underlying​ - Net Premium Paid – Brokerage & Commission

Assuming underlying ends at $60, then profit = $100 - $60 - $20 – Brokerage

= $20 – Brokerage

The Risk or Loss area is the region where the BROWN payoff function lies BELOW the horizontal axis. In this example, it lies between these two breakeven points i.e. this position will be loss-making when the underlying price remains between $80 and $110. Loss amount will vary linearly depending upon where the underlying price is.

Maximum Loss in Strap Option Trading = Net Option premium paid + Brokerage & Commission

In this example, maximum loss = $20 + Brokerage

Factors to Consider

Strap Option Trading Strategy is perfect for a trader expecting a considerable price movement in the underlying stock price, is uncertain about the direction, but also expects higher probability of an upward price move. There may be a big price move expected in either direction, but chances are more that it will be in the upward direction.

Real life scenarios ideal for Strap Option trading include

  • Launch of a new product by a company
  • Expecting too good / too poor earnings to be reported by the company
  • Results of a project bidding for which the company has placed a bid

A product launch may be a success/failure, earnings may be too good/too bad, a bid may be won /lost by the company – all of which may lead to big price swings uncertain of the direction.

The Bottom Line

The strap option strategy fits well for short-term traders who will benefit from the high volatility in underlying price movement in either direction. Long-term option traders should avoid this, as purchasing three options for long term will lead to considerable premium going towards time decay value which erodes over time. As with any other short term trade strategy, it is advisable to keep a clear profit target and exit the position once target is achieved. Although the stop-loss is already built-in this strap position (due to the limited maximum loss), active strap options traders do keep other stop-loss levels based on underlying price movement and indicative volatility. The trader needs to take a call on upward or downward probability, and accordingly select Strap or Strip positions.​

Related Articles
  1. Chart Advisor

    2 Short-Term and 2 Longer-Term Trade Ideas

    Two shorter-term and two longer-term trade ideas to consider, based on trends and the possibility of a breakout.
  2. Chart Advisor

    ChartAdvisor for November 27 2015

    Weekly technical summary of the major U.S. indexes.
  3. Chart Advisor

    Pay Attention To These Stock Patterns Playing Out

    The stocks are all moving different types of patterns. A breakout could signal a major price move in the trending direction, or it could reverse the trend.
  4. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  5. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  6. Credit & Loans

    Pre-Qualified Vs. Pre-Approved - What's The Difference?

    These terms may sound the same, but they mean very different things for homebuyers.
  7. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  8. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  9. Insurance

    Cashing in Your Life Insurance Policy

    Tough times call for desperate measures, but is raiding your life insurance policy even worth considering?
  10. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  1. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  2. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  3. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  4. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  5. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  6. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center