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Strip & Strap – Options Strategy

A Strip is a strategy consisting of buying a call and two puts with the same strike price and maturity. It is similar to a straddle but in this strategy, the investor bets on a sharp decline in the price of the underlying asset. In a Strip, the buyer of the strategy is gamma and vega positive, as well as theta negative, because he is a buyer of options. All adjustments made to the spot will therefore be profitable and will compensate for the payment of the premium, generated by the purchase of the three options. However, the investor will also pay a higher time value due to the purchase of the options with a strike price close or equal to ATMF. This will imply that the investor is already gamma and vega maximum as soon as the strategy is put in place. This strategy can also work on a put basis, which implies that if the investor sells options, he will be negative gamma and vega as well as positive theta.

The payoffs of the strategy are illustrated below:

The Strap is a strategy similar to the Strip except that in the Strip, the investor buys two calls and one put with the same strike price and maturity. Unlike the Strip, the Strap is implemented when the investor expects a high degree of volatility in the price of the underlying asset, but more upwards than downwards. With a Strap, the investor is buying options, so he will be gamma and vega positive as well as theta positive. On the other hand, if the investor decides to set up a short strap, i.e. sells the options, he will be theta positive as well as gamma and vega negative. Just like a Strip, the strike price of the three options is equal or very close to the ATMF for the Strap.

The payoffs of the strategy are illustrated below:

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