Strips & StrapsOptions
Straddles utilize options to benefit from a large, or alternatively small, amount of price volatility. A long straddle profits from a high amount of volatility, while a short straddle profits from a low amount. Due to their construction, the direction of price movements within straddles is not as important as the actual volatility level. A long straddle profits if price moves outside of two boundaries. A short straddle profits if the price stays within the two boundaries.
Strips and Straps are both modifications on the straddle construction. A strip purchases 2 puts for each single call at the same expiration date and same exercise price. It bets on volatility with higher profit from downward movement if holding a long strip, and bets on lower volatility and slightly upward movement if writing a short strip. The price must stay within the boundaries for short strips, but punishes you less if you the price rises above the profit range than if it falls out of the profit range.
A strap purchases 2 calls for each single put at the same expiration date and same exercise price. It bets on volatility with higher profit from upward movement if holding a long strap, and bets on lower volatility and slightly downward movement if writing the short strap. The price must stay within the boundaries for short straps, but punishes you less if you the price falls below the profit range than if it rises above the profit range.
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