Its easy to make money when the economy is doing well and the markets are all trending up. However, this scenario rarely happens in real life. On most days the markets are not very predictable and this poses a challenge even to experienced traders. Market neutral strategies have been developed to minimize risks and allow investors to gain profits no matter which way the prices go. There are several of them with each one favoring a certain condition over the other. In this article, we will delve deeper into strap options: a market neutral bullish strategy.

What are Strap Options?

The difference between strap options and other market neutral strategies is that it is geared more towards a bullish movement. Those who employ this strategy have a good chance of making profits no matter how the price moves but the profit potential is greater if there is an upward shift compared to a downward shift. In fact, strap options can provide traders with potentially unbounded profits if the underlying assets price continues to rise. However, the profit potential when the price dips is much more limited. As for potential losses, the amount will always be limited to the payment for the option and brokers fees.

How to Create Strap Options

The construction requires effort, ample funds, and a lot of faith. This strategy is more expensive than regular trades as it needs three separate purchases. Two of these should be at-the-money CALL options while the other one should be an at-the-money PUT option. These options will be linked by a singular underlying asset, typically a stock, an index, a commodity or a currency pair. They must all expire at the same date and specify the same strike price.

When Strap Options Should Be Used

Strap options are ideal in several situations wherein the outcome of an event is uncertain. For instance, a company may be due to report its quarterly earnings and people are not entirely sure if it has recovered from a slump or it has continued to slide. It may also be employed in anticipation of a product launch in a brand new line. The company is known for their excellent ideas so the tendency is for the stocks to go up but there is still an element of anxiety given that they are betting on an unproven concept. Lastly, the strap is perfect for companies involved in massive biddings as they can win big or lose big.

The thing to remember about strap options: a market neutral bullish strategy is much more profitable when the underlying assets price goes up instead of going down. Therefore, it should be used judiciously whenever there is doubt about future results but the sentiment is largely positive. It works best for short-term volatility driven by disruptive events that are known in advance.