Question

Explain the differences between STRAP and straddle options trading strategdy and Why would an investor choose one over the other? and give an example of each?

Answer 1

Dear Student,

To clear your Doubt, we can Discuss the Below points

• What is call option and put option
• What is STRAP and Straddle Strategies

Key Differences Between Call and Put Options

1. The buyer of a call option has the right but is not necessarily obligated to buy pre-decided quantity at a certain futuristic date (expiration date) for a certain strike price. Conversely, put options will empower the buyer with the right to sell the underlying security for the strike price at a futuristic date for a pre-determined quantity. However, they are not obligated for the same.
2. A call option permits buying of an option whereas a put will permit the selling of an option.
3. The call option generates money when the value of the underlying asset is rising upwards whereas the put option will extract money when the value of underlying is falling.
4. As a continuation of the above, the potential gain in a call option is unlimited due to no mathematical limitation in the rising price of any underlying whereas the potential gain in a put option will mathematically be restricted.
5. Despite being bound by a single contract, the investor of a call option will look for a rise in the price of a security. Conversely, in the put option, the investor expects the stock price to fall down.
6. Both options can be In the Money or Out of the Money. In the case of the call option, the underlying asset price is above the strike price of the call. Out of the money indicates the underlying asset price is below the call strike price. Another aspect is ‘At the Money’ meaning strike price and underlying asset price is the same. The premium amount will be higher for ‘In the Money option’ since it has an intrinsic value whilst premium is lower for Out of the Money call options.
   With respect to put options, In the Money indicates underlying asset price below the strike price. Out of the Money is when the underlying asset price is above the put price. The premium amount for ‘In the Money’ option will be higher but the expectation of ‘in the money’ is opposite to what it was in call option.
7. Buying a call option requires the buyer to pay a premium to the seller of the call option. However, no margin has to be deposited with the stock exchange. However, selling a put requires the seller to deposit margin money with the stock exchange which offers the advantage to pocket the premium amount on the put option.

What Is a Strap?

A strap, or a long strap, is an options strategy using one put and two calls with the same strike and expiration. Traders use it when they believe a large move in the underlying asset is likely although the direction is still uncertain. All options in a strap are at the money. A strap is similar to a straddle but because there are two calls for every put, the strategy does lean bullish. A short strap would sell one put and two calls but this strategy profit when the underlying does not move.

A strap is may also be referred to as a "triple option".

Straddles

A straddle is a strategy accomplished by holding an equal number of puts and calls with the same strike price and expiration dates. The following are the two types of straddle positions.

• Long Straddle—The long straddle is designed around the purchase of a put and a call at the exact same strike price and expiration date. The long straddle is meant to take advantage of the market price change by exploiting increased volatility. Regardless of which direction the market's price moves, a long straddle position will have you positioned to take advantage of it.

Short Straddle—The short straddle requires the trader to sell both a put and a call option at the same strike price and expiration date. By selling the options, a trader is able to collect the premium as a profit. A trader only thrives when a short straddle is in a market with little or no volatility. The opportunity to profit will be based 100% on the market's lack of ability to move up or down. If the market develops a bias either way, then the total premium collected is at jeopardy