Short Strap Strangle

How does a Short Strap Strangle work in Options Trading?

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Short Strap Strangle - Introduction

The Short Strap Strangle, is a Short Strangle which writes more call options than put options and has a bearish inclination.

As a Neutral Options Strategy, Short Strap Strangles are useful when a stock with a neutral outlook is assessed to have a higher chance of breaking out to downside than upside. Short Strap Strangles transfers some of the upside risk to downside, creating an asymmetric risk graph that makes a lower loss if the stock breaks to downside than upside.

Short Strap Strangles also make a higher maximum profit than a regular short Strangle due to the fact that the minimum amount of short options are more than a regular short Strangle. It is this flexibility in transferring risk that makes options trading so versatile.

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Main Differences Between Short Strap Strangle and Regular Short Strangle

The main difference between the Short Strap Strangle and the regular short Strangle options trading strategy is that short Strap Strangles writes more call options than put options. A regular short Strangle writes the same number of out of the money put options and call options and has a symmetrical risk graph with equal loss to upside and downside. Short Strap Strangles writes more out of the money call options than put options, resulting in an options trading risk graph with steeper loss to upside than downside. Short Strap Strangles would also have a farther downside breakeven point than upside as there are more call options to overcome the premium gain of the lesser put options.

Short Strip Strangle Versus Regular Short Strangle Example Assuming QQQQ trading at $43.00. Regular Short Strangle Sell To Open 1 contract of Jan $44 Call at $0.75 Sell To Open 1 contract of Jan $42 Put at $0.75. Net Credit = $0.75 + $0.75 = $1.50 Short Strap Strangle Sell To Open 2 contracts of Jan $44 Call at $0.75 Sell To Open 1 contracts of Jan $42 Put at $0.75. Net Credit = $0.75 x 3 = $2.25

The regular short Strangle can also be given a bullish inclination through writing more put options than call options, creating a Short Strip Strangle. Short Strip Strangle and Short Strap Strangle are the two variants of the Short Strangle options trading strategy that options traders can use to introduce a bearish or bullish inclination.

When To Use Short Strap Strangle?

One should use a Short Strap Strangle when one speculates that a stock would go sideways but if it breaks out, it will most probably to downside.

How To Use Short Strap Strangle?

Sell to Open 2 x Out of The Money (OTM) Call Options and Sell to Open Out of The Money (OTM) Put options.

Short Strip Strangle Versus Regular Short Strangle Example Assuming QQQQ trading at $43.00. Short Strap Strangle Sell To Open 2 contracts of Jan $44 Call at $0.75 Sell To Open 1 contracts of Jan $42 Put at $0.75. Net Credit = $0.75 x 3 = $2.25

Trading Level Required For Short Strap Strangle

A Level 5 options trading account that allows the writing of naked options is needed for the Short Strap Strangle. Read more about Options Account Trading Levels.

Profit Potential of Short Strap Strangle :

Short Strap Strangles make their maximum profit when the stock closes at the strike price of the options upon expiration.

Profit Calculation of Short Strap Strangle:

Maximum Profit = Net Credit

Maximum Loss = Unlimited as long as the stock keep rising or falling.

From the above example : Maximum Profit = $2.25

Risk / Reward of Short Strap Strangle:

Upside Maximum Profit: Limited

Maximum Loss: Unlimited

Breakeven Points of Short Strap Strangle:

A Short Strap Strangle makes a profit if the stock stays between its upper breakeven point and lower breakeven point.

Upper Breakeven Point = Higher Strike price + (net credit/[number of call options/number of put options])

Lower Breakeven Point = Lower Strike price - net credit

From the above example : Upper Breakeven Point: 44 + (2.25/[2/1]) = 44 + 1.13 = $45.13 Lower Breakeven Point: 42 - 2.25 = $39.75 You would notice at this point that a Short Strip Strangle has a closer upper breakeven point than its lower breakeven point. This is the effect of writing more call options than put options. This allows the Short Strap Strangle to remain in profit longer if the stock go down, hence giving it a bearish inclination.

Advantages Of Short Strap Strangle:

Higher profit than a regular short Strangle.

Farther lower breakeven point.

Disadvantages Of Short Strap Strangle:

Higher margin requirement than a regular short Strangle since more options are written.

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