Lecture no 30 strap
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The document describes the 'strap' options trading strategy, which involves buying one at-the-money put and two at-the-money calls to capitalize on expected upward volatility, particularly around earnings announcements. It emphasizes managing time decay, advises on selecting stocks in consolidation patterns, and outlines the steps for entry and exit in a strap trade. Although the strategy limits risk and has unlimited profit potential, it is costly and requires significant movement to be profitable.
![Context - strap
Effect of Time Decay
• Time decay is harmful to the Strap. Never keep a Strap into the last
month to expiration because this is when time decay accelerates the
fastest.
Time Period to Trade
We want to combine safety with prudence on cost. Therefore the
optimum time period to trade straps
Breakeven Down = [Strike – net debit ]
Breakeven Up = [Strike + Half the net debit]](https://image.slidesharecdn.com/lectureno30-strap-200703114909/85/Lecture-no-30-strap-7-320.jpg)
Lecture no 30 strap
- 1. Lecture No 30 Strap Rohan Sharma (Coach)
- 2. Basics Concepts – strap Proficiency - Expert Direction – Bullish Volatility - High Asset Leg – 1 Long Put + 2 Long Call Max Risk - Limited Max Reward - Unlimited Capital Gain Strategies
- 3. Description – strap The Strap is a simple adjustment to the Straddle to make it more biased to the upside. Only do a Strap on a stock that is close to making an announcement, such as the week before an earnings report. The closer we get to expiration, the less time value there is in the option. Time decay accelerates exponentially during the last month before expiration Try to find a stock that is forming a consolidation pattern, such as a flag or pennant
- 4. Description – strap Buy one ATM strike put with the same expiration. Buy two ATM strike calls •Keep the ratio as two Calls for one Put.
- 5. Context - strap Outlook • With straps, your outlook is neutral to bullish. You are looking for increasing volatility with the stock price moving explosively in either direction, preferably to the upside. •Rationale • To execute a neutral to bullish trade for a capital gain while expecting a surge in volatility to the upside. • Ideally you are looking for a scenario where Implied Volatility is currently very low, giving you low option prices, but the stock is about to make an explosive move—you don’t know which direction, but you have a bias toward the downside.
- 6. Context - strap Net Position This is a net debit transaction because you have bought calls and puts. Your maximum risk on the trade itself is limited to the net debit of the bought calls and puts. Your maximum reward is potentially unlimited.
- 7. Context - strap Effect of Time Decay • Time decay is harmful to the Strap. Never keep a Strap into the last month to expiration because this is when time decay accelerates the fastest. Time Period to Trade We want to combine safety with prudence on cost. Therefore the optimum time period to trade straps Breakeven Down = [Strike – net debit ] Breakeven Up = [Strike + Half the net debit]
- 8. Steps to Trading a strap Steps In Actively seek chart patterns that appear like pennant formations, signifying a consolidating price pattern. Try to concentrate on stocks with news events and earning reports about to happen within a weeks. Choose a stock price range you feel comfortable with.
- 9. Steps to Trading a strap Steps Out Manage your position according to the rules defined in your Trading Plan. Exit either a few days after the news event occurs where there is no movement, or after the news event where there has been profitable movement. If the stock thrusts up, sell the calls (making a profit for the entire position) and wait for a retracement to profit from the put. If the stock thrusts down, sell the put (making a profit for the entire position) and wait for a retracement to profit from the calls. Try to avoid holding into the last month; otherwise, you’ll be exposed to serious time decay.
- 10. Exiting the Trade - strap Exiting the Position With this strategy, you can simply unravel the spread by selling your calls and puts. You can also exit only your profitable leg of the trade and hope that the stock retraces to favor the unprofitable side later on. Mitigating a Loss Sell the position if you have only one month left to expiration. Do not hold on, hoping for the best, because you risk losing your entire stake.
- 11. Advantages and Disadvantages Advantages Profit from a volatile stock moving in either direction. Capped risk Uncapped profit potential if the stock moves. Disadvantages Expensive—you have to buy the ATM call and puts. Significant movement of the stock and option prices is required to make a profit. Bid/Ask Spread can adversely affect the quality of the trade. Psychologically demanding strategy.
- 12. Real Time Example Rohan Sharma (Coach)
- 13. Price Movement Position on Charts Rohan Sharma (Coach)
- 15. Example – Strap Market Behavior Nifty Option /Future Buy ATM Call & Put Action (Long/ Short) Both Price Movement Expectation Breakout (High Volatility) / Bullish Expectation Spot Price 11700 Strike Price (2 Long Call) 11700 Premium 90 Strike Price ( 1 Long Put) 11700 Premium 95 Break Even (Up) Higher Strike + ½ Net Debit (11700 + 137.5) = 11837.5 Breakeven (Down) Strike – Net Debit (11700 – 275 ) = 11425 Time to Expiry Start/Mid of the Month Position of Price in Charts At Absolute Bottom / Absolute Top /Break Out on Upside Max Risk Limited Max Reward Un Limited
- 16. Strap Strike Price Long Call 11700 Premium 90 Strike Price Long Put 11700 Premium 95 Nifty at Expiry 2 Lot Long Call BEP - 11790 1 Lot Long Put BEP – 11605 Total P&L 12300 1020 -95 925 12100 620 -95 525 11900 220 -95 125 11800 20 -95 -75 11700 -180 -95 -275 11600 -180 5 -175 11500 -180 105 -75 11400 -180 205 25 11200 -180 405 225 11000 -180 605 425