Strap Option Trading: Maximum Profit & Loss: Options, Futures, Derivatives & Commodity Trading

# Strap Option Trading: Maximum Profit & Loss

Continuing further from our past article on Strap Option Trading: Payoff Functions Explained with Example. here are the details of maximum profit and loss of Strap option trading.
What is the maximum profit that can be achieved in Strap Option Trading
As we can see from the BROWN colored payoff function, the maximum profit comes when the underlying makes a big move in the upward direction. The farther the underlying stock price moves, the more profit the Strap option trader makes.
On the downside also, there is profit.

How? Since there are 2 call options, for every price move in the underlying, there is double the profit. On the upside, when the stock price keeps moving up, the profits keep increasing. What is more interesting is that since there are 2 call options, for eery one price point movement in the underlying stock, there is twice the profit on the upward side.
ON the downward side, the profit is one is to one - i.e. for every price point movement on the lower side, there is one profit point.
Profit in Strap Option in upward direction = 2 x (Price of Underlying - Strike Price of Calls) - Net Premium Paid
= (Unlimited)

Profit in Strap Option in downward direction = Strike Price of Puts - Price of Underlying - Net Premium Paid

= 2 * 50 - 11 = \$ 89

What is the maximum loss incurred in Strap Option Trading
The maximum loss in trading long Strap option position is the net option premium paid
This will happen when the underlying stock price does not move much and stays near the stike price.

= \$11 + brokerage

What are the breakeen points of Strap Option Trading
There are 2 breakeven points for Strap Option Trade - one on the upper side and other on the lower side.

- Lower Breakeven Point for Strap Option Trade = Strike Price of Calls/Puts - Net Premium Paid
= \$50 - \$11 = \$39

- Upper Breakeven Point for Strap Option Trade = Strike Price of Calls/Puts + (Net Premium Paid/2)
= \$50 +\$11/2 = \$55.5

So what this means? It means that the Strap Option buyer will be in loss if the underlying stock price remains between \$39 and \$55.5 (plus option trading commission and brokerage). The Option trader will be in profit only if
- either the stock price goes above \$55.5 OR
- the stock price goes below \$39

 Posted by Shobhit See All Articles with