Contents

Strap

Strap is a neutral to bullish strategy executed when the volatility is expected to rise significantly in the future with the price moving upwards.

Trade this strategy only when the implied volatility (India VIX) is low when you are trading Nifty Options. Also, it is better to trade this strategy intraday than overnight as the decay overnight is significant in weekly options.

You can execute this strategy using Far Month options as you will give more time for the price to move and the overnight decay will be less.

Trade Set-Up

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Buy 2 ATM CALLs

Eg: Buy two 10000 CALLs

Naked Call 1-Finvezto

Buy 1 ATM PUT

Eg: Buy one 10000 PUT

Naked Put-Finvezto

Strap

 

strap-Finvezto

Entry Checklist

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Market Outlook
  • Only when you expect a huge move in the stock or the index
  • Lookout for stocks which are about to release results in the next 2 weeks. The volatility will go up in the last 1 or 2 weeks.
  • Look for Bollinger band squeeze or consolidation chart patterns
  • Volatility
  • Buy a Strap only when the volatility is low and on the rise
  • Positional or Intraday?
  • Hold overnight positions only in monthly options. Overnight decay is lesser in Monthly options compared to Weekly. You will also give more time for the price to move in your direction.
  • In weekly options, only hold intra-day positions as time decay in weekly options is significant overnight
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is limited to the premium paid for the 2 CALLs and 1 PUT
  • Reward [Profit]
  • Maximum profit is unlimited in theory. In practice, most of the time, the value of a Strap decays. The probabilities are against the position.
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is extremely harmful for the position. This strategy is one of the worst affected by time decay.
  • Volatility impact [Vega]
  • When the Volatility increases immediately after deploying the strategy, it is helpful for the position
  • Volatility crush is harmful for the position
  • Trade Management & Exit

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    Rolling & Adjustments
  • Rolling not applicable for net debit positions. Exit with stop loss.
  • Stop Loss & Exit
  • There are multiple ways to manage a strap.
  • If you are holding monthly options, you should exit at least 2 weeks before expiry as the decay in premium is high in the last 2 weeks
  • If you are trading weekly options, exit when your loss is 1-2% of your capital or within an hour of entering the position.
  • Do not hold a Strap more than an hour in weekly options
  • Here is another way to manage. Once you enter the position, you can immediately set a stop loss on both sides. Once the stop loss is hit on one side, you can trail the stop loss on the other side to lock profits.
  • Set Stop Loss at 1-2% of your capital. Do not over-leverage.