Strap Options Strategy: Complete Guide with Examples

The Strap is a volatility strategy with a bullish twist. While a standard straddle treats up and down moves equally, the strap strategy uses a 2:1 ratio of calls to puts, creating greater profit potential on rallies while still protecting against drops. This makes it perfect for situations where you expect a big move and believe that move is more likely to be upward. This guide covers everything you need to know about the strap options strategy.

What is a Strap?

A Strap is a modified straddle that consists of buying two at-the-money calls and one at-the-money put with the same strike price and expiration. The 2:1 call-to-put ratio creates an asymmetric payoff - you make twice as much per dollar of upward movement compared to downward movement.

Strap Structure

The basic strap consists of three options:

• Buy 2 at-the-money calls
• Buy 1 at-the-money put
• All same strike and expiration

Profit and Loss Analysis

Using our $100 strike strap example with $12 cost:

Maximum Loss

• Occurs when stock closes exactly at the strike price ($100)
• All options expire worthless
• Loss: $12.00 ($1,200 per strap)

Upside Breakeven

With 2 calls working for you:

• Each dollar above $100 gains $2 (from 2 calls)
• Breakeven: $100 + ($12 / 2) = $106
• Stock needs to rally 6% to break even on upside

Downside Breakeven

With 1 put working for you:

• Each dollar below $100 gains $1 (from 1 put)
• Breakeven: $100 - $12 = $88
• Stock needs to drop 12% to break even on downside

Profit Potential

Profit is unlimited but asymmetric:

• At $120 (up 20%): Calls worth $40, Put worth $0 = Profit $28
• At $80 (down 20%): Calls worth $0, Put worth $20 = Profit $8
• Same 20% move, but upward move yields 3.5x more profit

Strap vs Straddle vs Strip

When to Use the Strap Strategy

The strap is ideal in specific situations:

• Earnings announcements: You expect a big move, likely positive
• FDA decisions: Biotech plays where approval is more likely than rejection
• Product launches: Expecting success but hedging for disappointment
• Technical breakouts: Stock at resistance with bullish momentum
• Merger arbitrage: Deal likely to close but protecting against collapse

Greeks of the Strap

Understanding the Greeks helps manage the position:

Delta

The strap has positive delta because you own 2 calls vs 1 put:

• At-the-money, each call has ~0.50 delta
• At-the-money, the put has ~-0.50 delta
• Net delta: (2 x 0.50) + (-0.50) = +0.50
• The position benefits from rising prices even before a big move

Gamma

High gamma means the delta changes quickly as the stock moves:

• Gamma is highest at the money
• As stock rises, delta increases (position becomes more bullish)
• As stock falls, delta decreases (position becomes more bearish)

Theta

Time decay works against you with three long options:

• All three options lose value each day
• Theta is highest when ATM and near expiration
• The strap decays 50% faster than a straddle

Vega

The strap benefits from rising implied volatility:

• With 3 long options, vega exposure is high
• Position gains value if IV increases
• Position loses value if IV decreases (IV crush after earnings)

Managing Strap Positions

Pre-Event Management

If you enter before a known event:

• Consider the IV crush that will occur after the event
• The stock must move enough to overcome both time decay and IV decline
• Calculate the implied move and compare to your expectations

Taking Profits

• Set a profit target before entering (e.g., 50% of cost)
• Consider closing one call if the stock rallies significantly
• Lock in profits rather than waiting for maximum gain

Cutting Losses

• Set a maximum loss threshold (e.g., 50% of premium)
• If the stock stays flat, theta will eat the position
• Close early if the expected catalyst does not happen

Advantages of the Strap

• Directional edge: Profits more from up moves while still hedging down
• Unlimited profit: No cap on potential gains in either direction
• Flexibility: Can convert to other positions by closing legs
• Known maximum loss: Limited to premium paid
• Perfect for biased volatility: When you expect movement with direction

Risks and Disadvantages

• High cost: 50% more expensive than a straddle
• Rapid time decay: Three options decay faster than two
• IV crush risk: Can lose money even if the stock moves
• Needs larger move: Higher breakevens than a straddle
• Wrong direction hurts: Downward moves profit less per dollar

Strap Variations

Ratio Strap

Instead of 2:1, use different ratios:

• 3:1 (3 calls, 1 put) for even more bullish bias
• 3:2 (3 calls, 2 puts) for moderate bullish bias

Strap Strangle

Use OTM options instead of ATM:

• Buy 2 OTM calls (e.g., $105 strike)
• Buy 1 OTM put (e.g., $95 strike)
• Lower cost but needs larger move to profit

Tips for Success

• Calculate breakevens: Know exactly how far the stock must move
• Consider IV levels: High IV means expensive options and potential crush
• Time your entry: Enter before expected catalysts, not during
• Size appropriately: The higher cost means smaller position sizes
• Have an exit plan: Know when you will take profits or cut losses
• Verify your bias: Only use straps when you have a genuine bullish lean

Summary

The Strap is a volatility strategy for traders who expect a big move with a bullish bias. By buying two calls and one put at the same strike, you create an asymmetric payoff that profits twice as much from rallies as from declines. This makes it perfect for situations like earnings or FDA announcements where you believe positive news is more likely but want protection if wrong. The trade-off is higher cost and faster time decay compared to a standard straddle. When your analysis suggests both volatility and direction, the strap provides an elegant solution.

Explore more volatility strategies in our guts strangle guide or learn about iron condors for premium selling.