How do strap and strip strategies express asymmetric volatility views?

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AcadiFi · Accepted Answer

A strap is a long 2 calls + 1 put at the same strike and expiry, creating a volatility-long position with bullish tilt. A strip is the opposite: long 2 puts + 1 call, volatility-long with bearish tilt. Example strap on stock at $60: buy 2 calls at 60 for $2.50 each, buy 1 put at 60 for $2.30. Total cost $7.30. Upside breakeven is $60 + $7.30/2 = $63.65. Downside breakeven is $60 - $7.30 = $52.70. The strap profits twice as fast on the upside because two call deltas versus one put delta.

Traders use straps before binary events where they expect volatility but lean bullish—earnings on a growth stock with strong guidance, M&A announcements where bidder reaction is uncertain but positive outcome more likely, or macro releases where positioning is skewed. Strips express the opposite: expectation of a large move but with bearish bias. Think FDA trial results where failure is more likely than success. The cost of the asymmetric position is higher than a plain straddle because you pay for the extra leg, so implied volatility must rise or the underlying must move beyond the wider breakeven. Delta is non-zero at inception, unlike a pure straddle.

How do strap and strip strategies express asymmetric volatility views?

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