Long Combo Option Trading Strategy is implemented when a trader is bullish in nature and expects the stock price to rise in the near future. Here a trader will sell one ‘Out of the Money’ Put Option and buy one ‘Out of the Money’ Call Option. This trade will require less capital to implement since the amount required to buy the call will be covered by the amount received
This strategy is exactly opposite to Covered Call Strategy. Here the investor is neutral or moderately bearish in nature and wants to take advantage of the price fall in the near future. The trader will short one lot of stock future. Now the trader will short ATM Put Option, the option strike price will be his exit price. If the prices rally above the strike price, the ..
This strategy is used when an investor Bullish on an underlying but don't have the required capital or the risk appetite to invest directly into it.
The Covered Put works well when the market is moderately Bearish.
Action
Sell OTM Put Option, Buy OTM Call Option
Sell Underlying Sell OTM Put Option
Breakeven Point
Call Strike + Net Premium
Futures Price + Premium Received
LONG COMBO Vs COVERED PUT - Risk & Reward
LONG COMBO
COVERED PUT
Maximum Profit Scenario
Underlying asset goes up and Call option exercised
The profit happens when the price of the underlying moves above strike price of Short Put.
Maximum Loss Scenario
Underlying asset goes down and Put option exercised
Price of Underlying - Sale Price of Underlying - Premium Received
Risk
Unlimited
Unlimited
Reward
Unlimited
Limited
LONG COMBO Vs COVERED PUT - Strategy Pros & Cons
LONG COMBO
COVERED PUT
Similar Strategies
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Bear Put Spread, Bear Call Spread
Disadvantage
• Losses can keep on increasing as the price of stock goes down. • High risk strategy.
• Limited profit, unlimited risk. • Trader should have enough experience before using this strategy.
Advantages
• Capital investment is low and returns are high. • Unlimited reward, returns keep on increasing with the increase on stock price. • Leverage facility provided by this strategy is very beneficial.
• Investors can book profit when underlying stock price drop, move sideways or rises by a small amount. • Able to generate monthly income. • Able to generate profit from fall in prices or mild increase in the prices.
