Strip is a simple adjustment to the Straddle to make it more biased toward the
downside. In buying a second put, the strategy retains its preference for high
volatility but now with a more bearish slant.
with the Straddle, we choose the at-the-money strike for both legs, which means
the strategy is expensive. We are therefore requiring a pretty big move,
preferably with the stock plunging downwards. As such, our risk is greater than
with the Straddle, and our reward is still uncapped. Because we bought double
the number of puts, our position improves at double the speed, so the break
even to the downside is slightly tighter. The break even to the upside is the
strike plus the net debit, which is more than the Straddle because we’ve bought
double the amount of puts.
the same challenges apply regarding Bid/Ask Spreads and the psychology of the
actual trade. Remember that time decay hurts long options positions because
options are like wasting assets. The closer we get to expiration, the less time
value there is in the option. Time decay accelerates exponentially during the
last month before expiration, so we don’t want to hold onto OTM or ATM options
into the last month.
the Straddle rules but buy twice as many puts as calls in order to make an
adjustment for the Strip.
it is important to follow the entry and exit rules (as for straddles), and
psychologically speaking, this is another tough strategy to play after you are
in. It is very easy to find reasons to exit, even though it is in breach of
your trading plan. But you must remember that you got in for a certain reason
(or reasons), and you must stay in until one of your other reasons compels you
is a reminder of the rules for trading straddles that you must also apply to
Choose your preferred stock price range. Some traders choose stocks between
$20.00 and $60.00, but that is a personal preference.
Only do a Strip on a stock that is close to making an announcement that may
cause a surprise jump in the stock price either way, such as the week before an
Buy at-the-money calls and puts with the expiration at least two months away,
preferably three. You can get away with four months if nothing else is
The cost of the Straddle should be less than half of the stock’s recent high
less its recent low. By recent, we mean the last 40 trading days for a
two-month Straddle, the last 60 trading days for a three-month Straddle,
or the last 80 days for a four-month Straddle. The point here is that the cost
of the Straddle should be low in comparison with the potential of the stock to
move. If this works
with the Straddle, then the Strip can be acceptable.
Exit within two weeks after the news event occurs. Never hold into the final
month before expiration. During the final month, your options will suffer
increasing time decay, which we don’t want to be exposed to.
Try to find a stock that is forming a consolidation pattern, such as a flag or
pennant, or in other words, where the stock price action has become tighter
and where volatility has shrunk in advance of a big move in either direction.
Typically we are looking for a pennant within the context of a
this strategy in a bearish environment for a capital gain. Use when volatility is
low but you expect increased volatility in either direction.
is trading at $25.37 on May 10, 2011.
two August 2011 25 strike puts at $1.70.
the August 2011 25 strike call for $2.40
benefit of this position is that you can profit from the stock moving in either
direction with capped risk.
risk is limited to the net debit of the bought calls and puts. The reward is
even up: strike plus net debit.
even down: strike minus half net debit.
high volatility with a bearish slant.
Of Time Decay
Do not keep a strip into the last month of expiration because of accelerated
the stock drops, you can sell puts to make a profit and wait for a retracement
to profit from the call.
the stock rises, you can sell the call to make a profit and wait for a
retracement to profit from the puts.
try not to hold position into the last month because of accelerated time decay.
out the position by selling the calls and puts.