Call & Put Buying Combinations
Straddle
The straddle is an unlimited profit, limited risk option trading strategy that is employed when the options trader believes thatthe price of the underlyingasset will make a strong move in either direction in the near future. It can be constructed by buying an equal number of at-the-money call and put options with the same expiration date.
Strangle
Like the straddle, the strangle is also a strategy that has limited risk and unlimited profit potential. The difference between the two strategies is that out-of-the-money options are purchased to construct the strangle, lowering the cost to establish the position but at the same time, a much larger move in the price of the underlying is required for the strategy to be profitable.
Strip
The strip is a modified, more bearish version of thecommon straddle. Construction is similar to the straddle except that the ratio of puts to calls purchased is 2 to 1.
Strap
The strap is a more bullish variant of the straddle. Twice the number of call options are purchased to modify the straddle into a strap.
Synthetic Underlying
Combinations can be used to create options positions that have the same payoff pattern as the underlying. These positions are known as synthetic underlying positions . Using equity options as an example, a synthetic long stock position can be created by buying at-the-money call and selling an equal number of at-the-money put options.
