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
When a trader is moderately bearish on the market he can implement this strategy. Bear-Put-Spread involves buying of ITM Put Option and selling of an OTM Put Option. If prices fall, the ITM Put option starts making profits and the OTM Put option also adds to profit at a certain extent if the expiry price stays above the OTM strike. However, if it falls below the OTM ..
LONG COMBO Vs BEAR PUT SPREAD - When & How to use ?
LONG COMBO
BEAR PUT SPREAD
Market View
Bullish
Bearish
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.
The bear call spread options strategy is used when you are bearish in market view. The strategy minimizes your risk in the event of prime movements going against your expectations.
Action
Sell OTM Put Option, Buy OTM Call Option
Buy ITM Put Option, Sell OTM Put Option
Breakeven Point
Call Strike + Net Premium
Strike Price of Long Put - Net Premium
LONG COMBO Vs BEAR PUT SPREAD - Risk & Reward
LONG COMBO
BEAR PUT SPREAD
Maximum Profit Scenario
Underlying asset goes up and Call option exercised
Max Profit = Strike Price of Long Put - Strike Price of Short Put - Net Premium Paid.
Maximum Loss Scenario
Underlying asset goes down and Put option exercised
Max Loss = Net Premium Paid.
Risk
Unlimited
Limited
Reward
Unlimited
Limited
LONG COMBO Vs BEAR PUT SPREAD - Strategy Pros & Cons
LONG COMBO
BEAR PUT SPREAD
Similar Strategies
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Bear Call Spread, Bull Call Spread
Disadvantage
• Losses can keep on increasing as the price of stock goes down. • High risk strategy.
• Limited profit. • Early assignment risk.
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.
• If the strike price, expiration date or underlying stocks are rightly chosen then risk of losses would be limited to the net premium paid. • This strategy works well in declining markets. • Limited risk.
