What is Strip Strategy?
The strip is one of the types of Long straddle strategies with some slight alterations. It is a bearish Market-neutral Strategy that gives double profit when the underlying asset price moves downward or upwards.
When to use?
A trader is supposed to believe very high price fluctuations in the market in the near future or while they are bullish on volatility factors when the market is moving at a good speed in either direction, that is the best time to apply this strategy. It is said to be a neutral to negative strategy.
How to apply ?
You can apply this strategy by buying one ATM (at-the-money) call option and two ATM (at-the-money) put options.
Note:- This strategy is costly compared to the long straddle and requires high fluctuation on the downside trend.
What is the Maximum Risk?
The highest loss is the Net Premium paid. When the underlying asset's price closes at the strike price during the expiry, a trader can incur the highest loss in the form of the net premium paid. At-the-money options will become zero and expire worthlessly, while the premium paid to buy the call and put options will be lost.
What is the Maximum Rewards?
The chances of making profit doubles when the trend is downwards. When the price of the underlying asset moves in either direction during the time of expiration, traders can see a significant profit.
Break Even point at expiration:
Two breakeven points.
The upper breakeven is received by adding the strike price with the premium paid.
The lower breakeven is received when you divide the premium paid by 2 and subtract it from the strike price.
Advantages :
You can take advantage of the volatility, as this is a neutral to bearish strategy. When the prices are low and are expected to fall more at that time, this strategy is beneficial.
Profit can be made with the price change in any direction
Loss is limited.
A trader can make an unlimited profit if the share price is moving.
Disadvantages :
Time factor affects the strategy in the last week of expiry , as the volatility is the big positive factor; time decay affects negatively.
We have seen that creating the strip strategy is very costly, and if the market does not make a move as desired, a trader can lose all the premium paid to create the strip strategy.
This strategy is expensive.
The price must fluctuate to make a profit
May affect negatively
How to exit ?
Two methods:
1.Close the position - Sell the call and put options you have bought
2.Mitigate the risk - Sell the position a few days before expiry.
Results
Scenario 1: Underlying closed below from put strike price make positive money.
Scenario 2: Underlying expires at ATM strike loss will be maximum.
Scenario 3: Underlying the expires at above Call option strike price loss will be minimised.
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