← Strategy LabLesson 25 · 4:02
Strap
Summary
Use a strap when you expect a big move and think up is more likely than down. You buy two $100 calls for $690 and one $100 put for $341, paying $1,031, which is the most you can lose if XYZ ends right at $100. There is no limit on the gain above, where you make $200 for each dollar XYZ rises, and you break even at $105.16 on the way up or $89.69 on the way down.
Key terms
- strap
- A long straddle with an extra call, two calls and one put at the same strike, betting on a big move that leans up.
- lopsided V
- A last-day line where one arm climbs twice as fast as the other, because one side has two options.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
- volatility
- The size of the swings a stock is expected to make, written as a yearly percentage, saying how far but not which way.
- break-even on either side
Check yourself
Answer each question to see why the right answer is right.
1. What does this strap cost in all?
2. XYZ ends at $90 on the last day. What is your result?
3. Why is the upper break-even $105.16?
4. XYZ ends at $110 on the last day. What is your result?
5. XYZ is at $105 and days pass with nothing else changing. What happens to your result?
Finished the video and the quiz? .