Strip (Options)
A strip is an options strategy consisting of buying one at-the-money call and two at-the-money puts on the same underlying asset with the same strike price and expiration, creating a bearish bias to a standard straddle. It profits from large moves in either direction but generates greater profit from downside moves than upside moves due to the extra put.
Key takeaways
- A strip combines one long call and two long puts at the same strike and expiration, making it a bearish variant of a straddle.
- The strategy profits from large moves in either direction, but the asymmetric structure means downside moves generate twice the profit of equivalent upside moves beyond the breakeven points.
- Maximum loss equals the total premium paid (one call premium plus two put premiums), realized when the underlying closes at the strike price at expiration.
- The lower breakeven is further from the strike than the upper breakeven due to the double put position.
- In futures markets, the term 'strip' also refers to a sequence of consecutive futures contracts traded as a single transaction, a distinct and separate usage.
Explanation
The options strip is a modified volatility strategy that introduces directional bias while retaining the core feature of profiting from large underlying price moves. By combining one long call and two long puts at the same strike, the trader pays more premium than a standard straddle (one call plus one put) but tilts the payoff profile downward. The additional put doubles the profit from downside moves relative to equivalent upside moves, making the strip appropriate when a trader expects significant volatility but harbors a bearish lean—for example, ahead of an event where bad news is more likely than good news, or where the downside shock would likely be larger in magnitude.
The breakeven mechanics illustrate the asymmetry clearly. Let C be the call premium, P be each put premium, and K the common strike. The total premium outlay is C + 2P. The upper breakeven is K + (C + 2P), because only the call generates value above the strike. The lower breakeven is K − (C + 2P)/2, because the two puts collectively gain value below the strike at twice the rate of the single call above it. For a typical ATM scenario, the lower breakeven is closer to the strike than the upper breakeven, meaning the position requires less downside move than upside move to reach profitability.
The Greeks of a strip reflect its composition. Delta is negative at inception because the two puts (each with delta approximately −0.5) more than offset the single call (delta approximately +0.5), yielding a net delta of approximately −0.5 per strip. This negative delta means the position will profit even from a modest downside move in the underlying before any option expires. Gamma is positive and large, accelerating gains as the underlying moves. Vega is positive (the position benefits from volatility expansion), and theta is negative (the position loses time value daily).
The term 'strip' has a second, distinct meaning in commodity and interest rate futures markets: a strip trade involves simultaneously buying or selling a series of consecutive monthly futures contracts as a package transaction. An energy strip might encompass 12 consecutive monthly crude oil futures contracts, creating a synthetic average price hedge for the year. This usage is entirely distinct from the options strategy and reflects the commodities market convention of pricing average-period exposure through a bundle of individual contracts. The price of the futures strip is quoted as the average of the individual contract prices, or sometimes as an arithmetic sum.
In fixed-income markets, an 'Eurodollar strip' refers to a sequence of consecutive Eurodollar futures contracts used to synthesize a term interest rate exposure—for example, buying eight consecutive quarterly Eurodollar futures to synthetically replicate a two-year fixed-rate position. This usage predates the options terminology and remains prevalent in interest rate trading desks globally.
Formula
Strip P&L = max(S_T − K, 0) + 2 × max(K − S_T, 0) − (C + 2P)
Example
An investor in a pharmaceutical company expects a clinical trial result to be announced in one month. The stock trades at $50, and the investor believes a negative result (probability ~60%) would be catastrophic, while a positive result (probability ~40%) would boost the stock moderately. The investor buys a strip: one $50 call at $3.00 and two $50 puts at $2.50 each, paying $8.00 total. The upper breakeven is $50 + $8.00 = $58.00. The lower breakeven is $50 − $8.00/2 = $46.00. If the trial fails and the stock falls to $35, the two puts are each worth $15, total gain = $30 − $8.00 = $22.00. If the trial succeeds and the stock rises to $63, the call is worth $13, net profit = $13 − $8.00 = $5.00. The asymmetric payoff reflects the investor's bearish bias.
Related terms
Asian Option At The Money Back Months Delta Eurodollar Futures Price Gamma Greeks Interest Rate Leaps Long Term Equity Anticipation Securities Option Premium