A trader shorts or writes a Call Option when he feels that underlying stock price is likely to go down. Selling Call Option is a strategy preferred for experienced traders.
However this strategy is very risky in nature. If the stock rallies on the upside, your risk becomes potentially unquantifiable and unlimited. If the strategy
Strip Strategy is the opposite of Strap Strategy. When a trader is bearish on the market and bullish on volatility then he will implement this strategy by buying two ATM Put Options & one ATM Call Option, of the same strike price, expiry date & underlying asset. If the prices move downwards then this strategy will make more profits compared to short straddle because of the ..
Upper Breakeven Point = Strike Price of Calls/Puts + Net Premium Paid, Lower Breakeven Point = Strike Price of Calls/Puts - (Net Premium Paid/2)
SHORT CALL Vs STRIP - When & How to use ?
SHORT CALL
STRIP
Market View
Bearish
Neutral
When to use?
It is an aggressive strategy and involves huge risks. It should be used only in case where trader is certain about the bearish market view on the underlying.
When a trader is bearish on the market and bullish on volatility then he will implement this strategy.
Action
Sell or Write Call Option
Buy 1 ATM Call, Buy 2 ATM Puts
Breakeven Point
Strike Price of Short Call + Premium Received
Upper Breakeven Point = Strike Price of Calls/Puts + Net Premium Paid, Lower Breakeven Point = Strike Price of Calls/Puts - (Net Premium Paid/2)
SHORT CALL Vs STRIP - Risk & Reward
SHORT CALL
STRIP
Maximum Profit Scenario
Max Profit = Premium Received
Price of Underlying - Strike Price of Calls - Net Premium Paid OR 2 x (Strike Price of Puts - Price of Underlying) - Net Premium Paid
Maximum Loss Scenario
Loss Occurs When Price of Underlying > Strike Price of Short Call + Premium Received
Net Premium Paid + Commissions Paid
Risk
Unlimited
Limited
Reward
Limited
Unlimited
SHORT CALL Vs STRIP - Strategy Pros & Cons
SHORT CALL
STRIP
Similar Strategies
Covered Put, Covered Calls
Strap, Short Put Ladder
Disadvantage
• Unlimited risk to the upside underlying stocks. • Potential loss more than the premium collected.
Expensive., The share price must change significantly to generate profit., High Bid/Offer spread can have a negative influence on the position.
Advantages
• With the help of this strategy, traders can book profit from falling prices in the underlying asset. • Less investment, more profit. • Traders can book profit when underlying stock price fall, move sideways or rise by a small amount.
Profit is generated when the share price changes in any direction., Limited loss., The profit is potentially unlimited when share prices are moving.
