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
Mr. X owns Reliance Shares and expects the price to rise in the near future. Mr. X is entitled to receive dividends for the shares he hold in cash market. Covered Call Strategy involves selling of OTM Call Option of the same underlying asset. The OTM Call Option Strike Price will generally be the price, where Mr. X will look to get out o ..
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.
An investor has a short term neutral view on the asset and for this reason holds the asset long and has a short position to generate income.
Action
Sell OTM Put Option, Buy OTM Call Option
(Buy Underlying) (Sell OTM Call Option)
Breakeven Point
Call Strike + Net Premium
Purchase Price of Underlying- Premium Received
LONG COMBO Vs COVERED CALL - Risk & Reward
LONG COMBO
COVERED CALL
Maximum Profit Scenario
Underlying asset goes up and Call option exercised
[Call Strike Price - Stock Price Paid] + Premium Received
Maximum Loss Scenario
Underlying asset goes down and Put option exercised
Purchase Price of Underlying - Price of Underlying) + Premium Received
Risk
Unlimited
Unlimited
Reward
Unlimited
Limited
LONG COMBO Vs COVERED CALL - Strategy Pros & Cons
LONG COMBO
COVERED CALL
Similar Strategies
-
Bull Call Spread
Disadvantage
• Losses can keep on increasing as the price of stock goes down. • High risk strategy.
• Unlimited risk, limited reward. • Inability to earn interest on the proceed used to buy the underlying stock.
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.
• Profit from option premium, rise in the underlying stock and dividends on the stock. • Allows you to generate income from your holding. • Profit when underlying stock price rise, move sideways or marginal fall.
