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A relatively simple trading strategy that involves buying a set of options, two calls and one put, with the same strike price and expiration date on a stock. The strap is a more focused version of the straddle, and is popular due to its unlimited profit, limited risk nature. The maximum loss that a strap can incur occurs when the equity price on the expiration date of the options is the same as the price on the date the options were purchased. In this case, the loss is equal to the sum the three-option set was purchased for. However, with any deviation in the price either up or down, the strategy recovers at least some of the cost of purchasing the options. See: Strip, Straddle
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
A bullish investment strategy in which an investor holds two calls and one put on the same underlying asset with the same expiration date and strike price. An investor uses a strap when he/she believes that the price of the underlying will increase substantially. If it does, the investor stands to make a substantial profit by exercising the calls. On the other hand, if the underlying decreases in price, the investor will not suffer a substantial loss because the strike price of the put protects him/her. See also: Call backspread ratio.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
A combination option made up of two calls and one put. The buyer of a strap profits from large variations in the price of the underlying asset, especially if it moves upward.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.