STRATEGY 9 : LONG COMBO : SELL OTM* PUT + BUY OTM* CALL
*OUT-OF- THE MONEY
A Long Combo is a Bullish strategy. If an investor is expecting the price of a stock to move up he can do a Long Combo strategy. It involves selling an OTM (lower strike) Put and buying an OTM (higher strike) Call. This strategy simulates the action of buying a stock (or a futures) but at a fraction of the stock price. It is an inexpensive trade, similar in pay-off to Long Stock, except there is a gap between the strikes . As the stock price rises the strategy starts making profits. Let us try and understand Long Combo with an example.
When to Use: Investor is Bullish on the stock/INDEX.
Risk: Unlimited (Lower Strike + net debit)
Reward: Unlimited
Breakeven : Higher strike + net debit
Example:
A NIFTY. is trading at Rs. 5861.50. Mr. XYZ is bullish on the NIFTY. But does not want to invest 5861.50. He does a Long Combo. He sells a Put option with a strike price Rs. 5700 at a premium of Rs. 34 and buys a Call Option with a strike price of Rs. 5900 at a premium of Rs. 59. The net cost of the strategy (net debit) is Rs. 25.
Strategy : Sell a Put + Buy a Call
Current NIFTY Index (Rs.) 5861.50
Sells Put Strike Price (Rs.) 5700
Mr. XYZ receives Premium (Rs.) 34
Buys Call Strike Price (Rs.) 5900
Mr. XYZ pays Premium (Rs.) 59
Net Debit (Rs.) 25
Break Even Point (Rs.) (Higher Strike + Net Debit) Rs. 5925
For a small investment of Re. 25 (net debit), the returns can be very high in a Long Combo, but only if the stock/ index moves up. Otherwise the potential losses can also be high.
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