Strip Option Trading: Explained with Example: Options, Futures, Derivatives & Commodity Trading

Strip Option Trading: Explained with Example

Details about Strip Option Trading explained with example
This series of articles will be dedicated to explaining "Strip Option Trading".
The term "strip" is said to be a modified case of another commonly traded option combination called "Long Straddle Option Trading". One thing to note is that Strip is has bearish outlook for the option buyer or trader. It is called strip because of the fact that there is a kind of "skewed" payoff (as we will see shortly in the following section).

In which scenarios should an option trader trade Strip Option ?
An option trader can take the strip option position when he is expecting a big price move in the underlying stock or index price, but the direction of that move is not clear i.e. the expected big price movement can be either on the upside or on the downside. Till this point, the scenario is exactly similar to that of Long Straddle Option Trading. However, the thing that differentiates the long straddle with a strip is that the outlook is more bearish on the strip position while in long straddle the direction outlook is same on both directions.
Hence, an option trader can take strip position if there is a big price move expected but chances are more that it will be in the downward direction. This is typically the case when earnings report are expected from a company or a project bidding results are expected depending upon which the price of the underlying stock is expected to move.

One thing to note is that constructing the strip option position will require 3 option buys, hence it costs a lot of money for paying 3 option premiums.
Time decay will hit this strip position in a bad way because this is a net BUY position with 3 options (See Options Time Decay: Explained with Examples).

Now, let's head on to the understanding the Strip options in more details with Strip Option Trading: Payoff Functions Explained with Example
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