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Strap

Description
	
	The Strap is a simple adjustment to the Straddle to make it more biased to the
	upside. In buying a second call, the strategy retains its preference for high volatility
	but now with a more bullish slant.
	  As with the Straddle, we choose the ATM strike for both legs, which means the
	strategy is expensive. We are therefore requiring a pretty big move, preferably with
	the stock soaring upwards. As such, our risk is greater than with the Straddle, and
	our reward is still uncapped. Because we bought double the number of calls, our
	position improves at double the speed, so the breakeven to the upside is slightly
	tighter. The breakeven to the downside is the strike less the net debit, which is more
	than the Straddle because we’ve bought double the amount of calls.
	  Again 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 dont want to hold onto OTM or ATM options into the last
	  month.
	     Use the Straddle rules but buy twice as many calls as puts in order to make an
	  adjustment for the Strap.
	     Again, it’s important to follow the entry and exit rules (as for straddles), and psy-
	  chologically speaking, its another tough strategy to play after you are in. Its very
	  easy to find reasons to exit, even though its 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 to exit.
	     Here’s a reminder of the rules for trading straddles that you must also apply for
	  straps:
	
	  1. Choose your preferred stock price range. Some traders choose stocks between
	     $20.00 and $60.00, but that’s a personal preference.
	
	  2. Only do a Strap on a stock that is close to making an announcement, such as
	     the week before an earnings report.
	
	  3. Buy ATM calls and puts with the expiration at least two months away, prefer-
	     ably three. You can get away with four months if nothing else is available.
	
	  4. The cost of the Straddle should be less than half of the stocks 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 Strap can be acceptable.
	
	  5. 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.
	
	  6. 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’re looking for a pennant within the context of an
	     upward trend.
	     
P/L Profile

     	

	



 
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