Strip – The Option Strategy Desk Reference

Strip

Strategy: Buy 2n ATM Puts, Expire 90 DTE

Buy n ATM Calls, Same Expiry

Example:

Price Chart: A series of strong directional price moves on a downward trending security

Current IV%: 25% (to reduce premium values)

IV Rank: 10 to 25

Trade: Buy 2n ATM put options; buy n ATM call options (All options expire 90 DTE.)

Strike Deltas: (both strikes ATM)

Long ATM Calls 0.50

Long ATM Puts 0.50

Goals: A strong directional price move benefits one of the ATM long options as it moves deeper ITM. The strip option strategy favors a price drop rather than a price rally. The opposite long option is sold as soon as the trader is confident that the directional price move will continue. The strip option strategy favors a drop rather than a rally because of the 2:1 put-to-call ratio.

Manage: Watch for a strong directional price move. Respond by selling the losing long options to recover as much premium as possible. Retain the long options as they move deeper ITM. Once a satisfactory profit is achieved, sell the remaining long options. If ample time remains, consider using the long options to cover a bull call or a bear put vertical in order to collect additional premium.

Profit: Close when the remaining options achieve a profit of 30 percent or more.

Loss: Close if the directional move changes and begins to reduce the value of the remaining options.