Long Combo Options Strategy
| Long Combo Options Strategy | |
|---|---|
| Strategy Level: | Advance Your Trading Skills |
| Instruments Traded: | Call + Put Options |
| Number of Positions: | 2 |
| Market View: | Bullish Outlook |
| Risk Profile: | Exploring Risk and Reward |
| Reward Profile: | Gaining Insight into Potential Returns |
| Breakeven Point: | Calculating Break-Even for Better Planning |
The Long Combo Options Strategy involves trading both Call and Put Options with a Bullish Outlook, exploring risk and reward, and gaining insight into potential returns by calculating the breakeven point for better planning.
Within the realm of trading, the Long Combo emerges as a bullish tactic skillfully employed by traders with a keen eye on an imminent rise in stock prices. This strategy orchestrates the purchase of an out-of-the-money (OTM) call option in tandem with the sale of an OTM put option. By intertwining these actions, traders tap into a distinctive advantage: the premiums yielded from the sold put options function as a shield, defraying the expenses associated with the call options. This dynamic interplay renders the strategy less demanding in terms of capital investment.
How the Long Combo Strategy Works
Let’s consider a scenario with Axis Bank shares currently trading at the current market rate of Rs 949. If you have a bullish view but lack sufficient capital for direct investment, you can opt for the Long Combo Strategy. In this example, you sell an Axis Bank Put Option at Rs 400 strike price, earning a premium of Rs 25, and simultaneously buy an Axis Bank Call Option at Rs 600 strike price, incurring a premium cost of Rs 35. By using this strategy, you invest less money upfront, and if Axis Bank’s shares rise as anticipated, you stand to gain significant returns.
When to Use the Long Combo Strategy?
The Long Combo Strategy is particularly useful when you hold a bullish outlook on an underlying asset but have limited capital or prefer a more conservative approach to investing.
Example of the Long Combo Option Strategy
- Axis Bank Stock Price: Rs. 949
- Lot Size: 75
- Short Put Option Strike Prices: Rs 400
- Premium Received: Rs 25
- Long Call Option Strike Prices: Rs. 600
- Premium Paid: Rs 35
- Net Premium Paid: Rs 10
- Breakeven Point: Rs. 610 (Call Strike price + Net Premium)
Long Combo Option Strategy Payoff Schedule
| Axis Bank Closing price (Rs) | Short Put Option Payoff | Long Call Option Payoff (in Rs) | Net Payoff in Rupees |
|---|---|---|---|
| 300 | -5625 | -2625 | -8250 |
| 400 | -1875 | -2625 | -4500 |
| 500 | 1875 | -2625 | -750 |
| 610 | 1875 | -1875 | 0 |
| 700 | 1875 | 4875 | 6750 |
| 800 | 1875 | 12375 | 14250 |
Market View – Staying Bullish
The Long Combo Strategy is most effective when you expect the underlying asset’s price to increase in the near future.
Long Combo: Risk Profile
The Long Combo strategy carries a high level of risk. If the price of the underlying falls below the lower strike, losses can occur. The extent of potential losses depends on how far the underlying’s price drops.
Long Combo: Reward Profile
Conversely, the Long Combo strategy offers the potential for high returns. Profits are realized if the underlying’s price is higher than the current market price. The magnitude of profit depends on the underlying’s price movement.
Long Combo Scenario with Maximum Profit
The Long Combo strategy achieves its maximum profit when the Call option is exercised, and the underlying asset’s price increases.
Max Loss Scenario of Long Combo
In contrast, the maximum loss scenario occurs when the underlying asset’s price falls, and the Put Option is exercised.
Long Combo: An Advantage
One of the significant advantages of the Long Combo strategy is its ability to reduce the cost of investing in a bullish stock while still delivering high returns when prices rise.
Long Combo: Disadvantages
However, if the prices do not move as predicted, substantial losses can be incurred.
How to Exit the Long Combo Strategy?
To exit the Long Combo Strategy profitably, it is recommended to book profits when the price of the underlying asset increases. You can also consider buying back the short option and selling the long option to optimize returns.
By using the Long Combo Option Trading Strategy, investors can employ a balanced approach to capitalize on bullish market sentiments while managing risks effectively. Remember always to conduct thorough research and consult with financial experts before implementing any trading strategy.
Get to know Other Strategies as Well:
Bull Put Spread Option Trading – A Strategy Explained
Bull Call Spread Options Trading Strategy
