Strip Strategy

1. Definition

A Strip is a modified Long Straddle strategy with a bearish bias. It is used when an investor expects a significant move in the underlying asset's price but believes a decline is more likely than an increase.

2. Market View

• High Volatility + Bearish Bias: The trader expects high volatility and wants to profit heavily from a crash, while still maintaining a hedge in case of an unexpected rally.

3. Setup

It involves buying ATM options with a 1:2 ratio. * Action: Buy 1 ATM Call + Buy 2 ATM Puts. * Cost: High Net Debit (Cost of 3 premiums).

4. Profit & Loss

4.1. Downside (Primary Goal)

Since the trader holds 2 Puts, profits accumulate twice as fast as losses if the stock price drops. This is the "sweet spot" of the strategy.

4.2. Upside (Hedge)

If the market rallies instead, the single Call option provides profit potential. However, the price must rise significantly to cover the cost of the two worthless Puts.

4.3. Max Loss

Occurs if the stock price remains unchanged at expiration. The trader loses the total premiums paid for all three contracts.