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
A trader, who is neutral in nature and believes that there will be very low volatility i.e. expects the market to remain range bound, will implement this strategy. This strategy involves selling of 2 ATM Call Options, buying 1 ITM Call Option & buying 1 OTM Call Option of the same expiry date & same underlying asset. The difference between the strikes sho ..
Upper Breakeven = Higher Strike Price - Net Premium, Lower Breakeven = Lower Strike Price + Net Premium
LONG COMBO Vs LONG CALL BUTTERFLY - When & How to use ?
LONG COMBO
LONG CALL BUTTERFLY
Market View
Bullish
Neutral
When to use?
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.
This strategy should be used when you're expecting no volatility in the price of the underlying.
Action
Sell OTM Put Option, Buy OTM Call Option
Sell 2 ATM Call, Buy 1 ITM Call, Buy 1 OTM Call
Breakeven Point
Call Strike + Net Premium
Upper Breakeven = Higher Strike Price - Net Premium, Lower Breakeven = Lower Strike Price + Net Premium
LONG COMBO Vs LONG CALL BUTTERFLY - Risk & Reward
LONG COMBO
LONG CALL BUTTERFLY
Maximum Profit Scenario
Underlying asset goes up and Call option exercised
Adjacent strikes - Net premium debit.
Maximum Loss Scenario
Underlying asset goes down and Put option exercised
Net Premium Paid
Risk
Unlimited
Limited
Reward
Unlimited
Limited
LONG COMBO Vs LONG CALL BUTTERFLY - Strategy Pros & Cons
LONG COMBO
LONG CALL BUTTERFLY
Similar Strategies
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Disadvantage
• Losses can keep on increasing as the price of stock goes down. • High risk strategy.
• Due to limited lifespan of call options, you can lose the premium paid. • Limited profit which is bound in a narrow range between the two wing strikes.
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.
• Under this strategy, a trader can book profit even when there is not volatility in the market. • Limited risks to the net premium paid. • This strategy allows you to gain more profits by investing less and limiting your losses to minimum.
