The strap is a modified, more bullish version of the common Long Straddle. It involves buying a number of at-the-money puts and twice the number of calls of the same underlying stock, striking price and expiration date.
Buy 2 calls; Buy 1 put. Use the same strike price and expiration date.
Straps are unlimited profit, limited risk options trading strategies that are used when the options trader thinks that the underlying stock price will experience significant volatility in the near term and is more likely to rally upwards instead of plunging downwards.
Unlimited Profit Potential
Large profit is attainable with the Strap strategy when the underlying stock price makes a strong move either upwards or downwards at expiration, with greater gains to be made with an upward move.
Unlimited as the stock price rises.
Limited Risk
Maximum loss for the strap occurs when the underlying stock price on expiration date is trading at the strike price of the call and put options purchased. At this price, all the options expire worthless and the options trader loses the entire initial debit taken to enter the trade.
Net opening cost.
Breakeven Point(s)
There are 2 break-even points for the strap position. The breakeven points can be calculated using the following formulae.
The breakeven can change depending on which strikes the stock finishes between.
Calculate the breakeven prices
- Strike price minus net opening cost. Use this result only if it is at or below the strike price.
- Net opening cost plus twice the strike price (divide the result by 2). Use this result only if it is at or above the strike price.
Ignore results below zero. A boundary price listed twice is a single breakeven.
Example
Suppose XYZ stock is trading at $40 in June. An options trader implements a strap by buying two JUL 40 calls for $400 and a JUL 40 put for $200. The net debit taken to enter the trade is $600, which is also his maximum possible loss.
If XYZ stock price plunges to $30 on expiration in July, the JUL 40 calls will expire worthless but the JUL 40 put will expire in-the-money and possess intrinsic value of $1000. Subtracting the initial debit of $600, the strap's profit comes to $400.
If XYZ stock is trading at $50 on expiration in July, the JUL 40 put will expire worthless but the two JUL 40 calls expire in the money and have an intrinsic value of $1000 each. Subtracting the initial debit of $600, the strap's profit comes to $1400.
On expiration in July, if XYZ stock is still trading at $40, both the JUL 40 put and the JUL 40 calls expire worthless and the strap suffers its maximum loss which is equal to the initial debit of $600 taken to enter the trade.
These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.
Commissions
For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.
For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.
Similar Strategies
The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.
Strip
The Strip is a modified straddle that has a bearish bias on the profit/risk potential.
Before expiration and assignment
The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.
Net opening cost means everything paid to open the position, less everything received. Include the shares as well as the options. If opening the position brings in money overall, treat that cost as a negative amount.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
Compare This Strategy
Optional further reading to help you compare the tradeoffs.
- Long Straddle vs Strip vs Strap — Choose whether the view is balanced or favors one direction, then account for the extra premium at risk.
