Option Strategies - Straps

Straps

Salient Features          

a) Market is expected to take volatile move but its direction is not clear
        b) Farther the exercise price from strike price more will be profit
        c) Unlimited profit and limited loss

Introduction:

When an investor expects the prices at the time of expiry of contract to remain outside a range of prices, he may enter into the Strips strategy, which is created by selling two calls and a put of same strike price. This strike price is the level from which he expects the prices to move farther. Let us take an example to understand this in detail- an investor takes following positions on 27th May 2005 when Nifty Spot was Rs.2070. Action Option type Strike Premium Total investment Long Call 2050 49 Long Call 2050 49 Long Put 2050 34 132

Here he buys two Nifty Calls and one Nifty Put of the same Strike price of Rs.2050 for which he pays a net amount of Rs.132 as premium {Rs.98 (49*2) paid for two Long Call positions and Rs.34 paid for a Long Put position} to create the position. His cash flow at different levels of Nifty closing on 30th June05(last Thursday of the following month) are as follows: Index Long call Long call Long put Investment Cash flow 1940               -           110         110 -132        88.00 1960               -             90           90 -132        48.00 1975               -             75           75 -132        18.00 1985               -             65           65 -132        (2.00) 2050               -             -             -   -132     (132.00) 2120               70           -             -   -132       (62.00) 2125               75           -             -   -132       (57.00) 2140               90           -             -   -132       (42.00) 2180             130           -             -   -132        (2.00) 2200             150           -             -   -132        18.00 2250             200           -             -   -132        68.00 2300             250           -             -   -132      118.00 2350             300           -             -   -132      168.00

Thus it is clear from above example that his profits will occur when the Index closes beyond a certain range (here it is Rs.1985 to Rs.2180), whereas in case of Index closing within this range, he will make loss.