Define the STRAP Strategy.

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mwestwood's profile pic

mwestwood | College Teacher | (Level 3) Distinguished Educator

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STRAP is term which relates to the Stock Exchange.  In commerce, it has to do with what is called a triple option, that consists of one (1) put option ["the right to sell a specified amount of an underlying security"] and two (2) call options [the right to purchase shares] for the same period and at the same time. It is of note that STRAP differs from STRIP in that with the triple option of STRIP, there are two put options and one call option, instead.

The STRAP strategy, or option, is employed when an investor is convinced that the future price movement of an underlying security will be large, and is much more likely to go up rather than down. If the price movement does, indeed, become large, the addition of two put options will provide a very large gain. However, if the prediction is wrong and the price has a sizable drop, the put options protect the investor from loss. 

While STRAP and STRIP both involve the purchase of premiums, by paying a premium for put options, the investor acquires a type of insurance against much greater cost than that of the premium. So with the "protective put" strategy as a type of insurance, an investor purchases sufficient "puts" to cover his holdings of what is termed the "underlying"; in this way, if there is a drastic drop of the price of the underlying, the investor has the option to sell his/her holdings at the strike price and not take a loss.

Sometimes, too, investors utilize STRAP for speculation in which they can assume short "positions" in the underlying stock without having to trade in it directly.

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sid-sarfraz's profile pic

sid-sarfraz | Student, Graduate | (Level 2) Salutatorian

Posted on

STRAP Strategy

A relatively simple trading strategy that involves buying a set of options, two calls and one put, with the same strike price and expiration date on a stock. The strap is a more focused version of the straddle, and is popular due to its unlimited profit, limited risk nature. The maximum loss that a strap can incur occurs when the equity price on the expiration date of the options is the same as the price on the date the options were purchased. In this case, the loss is equal to the sum the three-option set was purchased for. However, with any deviation in the price either up or down, the strategy recovers at least some of the cost of purchasing the options.

OR

A combination option made up of two calls and one put. The buyer of a strap profits from large variations in the price of the underlying asset, especially if it moves upward.

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