Selling a Strap

by David Jenyns on July 28, 2007

Selling a Strap
The reverse of the Strip and, also, a cousin of the Straddle is the Strap. It is a form of option contract that was unknown a dozen years ago. It is merely a combination of a Put on 100 shares and Call on 200 shares. To make a comparison: if a Straddle—one Put and one Call—will bring a premium of $500, and a Strip will bring a premium of $700, a Strap will bring a premium of about $800. If the Calls are exercised, the seller of the Strap will have to sell 200 shares at 50, which price will be increased by the $800 premium to an average sale price of 54. However, if the market declines and the one Put is exercised, the maker of the Strap will have to take or buy 100 shares at 50, but this price will be reduced to 42 also by reason of the $800 premium which he received for the sale of the Strap.

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