The strip option strategy is a powerful tool for traders who expect significant price movement but believe the stock is more likely to fall than rise. Unlike a standard straddle that profits equally from moves in either direction, the strip gives you extra profit potential on the downside. In this guide, we will explain how the strip works and when you should use it.
What is a Strip Option Strategy?
A strip is a modified straddle that uses two put options instead of one. You buy one at-the-money call and two at-the-money puts, all with the same strike price and expiration date. This creates a position that profits from large moves in either direction but makes twice as much money if the stock drops.
The simple version: A strip is like a straddle with an extra put option. You are betting on a big move but think the stock is more likely to go down than up.
How to Construct a Strip
Building a strip requires three options contracts at the same strike price and expiration:
- Buy 1 ATM call option
- Buy 2 ATM put options
Example
Stock XYZ is trading at $50. You expect a big move but think it is more likely to drop.
- Buy 1 $50 call for $3.00
- Buy 2 $50 puts for $2.80 each ($5.60 total)
- Total cost: $8.60 ($860 per position)
Your position now profits more if the stock drops than if it rises.
When to Use a Strip Strategy
The strip works best in specific market conditions:
- Before earnings announcements: When you expect bad news or a miss
- During market uncertainty: When fear is driving prices lower
- Ahead of economic data: When negative data could trigger a selloff
- On overvalued stocks: When you think a correction is coming
Profit and Loss Scenarios
Let us break down what happens in different scenarios using our example:
If the Stock Drops to $40
- Call expires worthless: -$3.00
- Both puts are worth $10 each: +$20.00
- Total value: $20.00 - $8.60 cost = $11.40 profit ($1,140)
If the Stock Rises to $60
- Call is worth $10: +$10.00
- Both puts expire worthless: -$5.60
- Total value: $10.00 - $8.60 cost = $1.40 profit ($140)
If the Stock Stays at $50
- All options expire worthless
- You lose the entire $8.60 premium ($860)
Breakeven Points
A strip has two breakeven points because it can profit in either direction:
- Upper breakeven: Strike price + total premium paid = $50 + $8.60 = $58.60
- Lower breakeven: Strike price - (total premium / 2) = $50 - $4.30 = $45.70
Notice that the lower breakeven is closer to the current price. This is because you have two puts working for you on the downside.
Strip vs Straddle: Key Differences
Understanding the difference between these strategies helps you choose the right one:
- Cost: A strip costs more because you are buying an extra put
- Directional bias: A strip favors downside moves; a straddle is neutral
- Profit potential: A strip makes 2x on the downside, 1x on the upside
- Breakeven: A strip has asymmetric breakeven points
Risk Management Tips
Because strips cost more than straddles, managing risk is crucial:
- Size your position correctly: The higher cost means you should trade smaller
- Set a time limit: Close the trade if your expected catalyst does not happen
- Consider rolling: If the stock moves but not enough, roll to a later expiration
- Take partial profits: If the stock drops quickly, consider closing one put
Greeks and the Strip Strategy
Understanding how the Greeks affect your strip position:
- Delta: Your position starts with negative delta because you have more puts than calls
- Gamma: High gamma means your delta changes quickly as the stock moves
- Theta: Time decay works against you because you own three options
- Vega: Rising volatility helps your position; falling volatility hurts
Common Mistakes to Avoid
- Buying too far from expiration: The extra put makes time decay even more painful
- Using it when you expect small moves: Strips need big moves to profit
- Ignoring implied volatility: High IV makes the strip expensive and reduces profit potential
- Holding through expiration: Close before expiration to avoid assignment headaches
Track Your Strip Trades
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Summary
The strip option strategy is ideal when you expect a big move and believe the stock is more likely to fall. By buying two puts and one call at the same strike, you create a position that profits twice as much on the downside. Remember that the extra put increases your cost and time decay, so use this strategy when you have a strong bearish conviction with a clear catalyst.
Want to learn more volatility strategies? Check out our guide on iron condors or learn about put ratio backspreads.