Long Combo Option Trading Strategy Explained

Published on Wednesday, April 18, 2018 | Modified on Sunday, July 7, 2019

Long Combo Options Strategy

Strategy Level	Advance
Instruments Traded	Call + Put
Number of Positions	2
Market View	Bullish
Risk Profile	Unlimited
Reward Profile	Unlimited
Breakeven Point	Call Strike + Net Premium

A long Combo strategy is a Bullish Trading Strategy employed when a trader is expecting the price of a stock, he is holding to move up. It involves selling an OTM Put and buying an OTM Call. The strategy requires less capital as the cost of Call Option is covered by premium received from Put Option.

Say SBI shares are currently trading at Rs 500. You are bullish on it but doesn't want to invest or have capital to do it. You can use Long Combo strategy here by selling a Put option of SBI at strike price of Rs 400 and buying a Call Option at a strike price of Rs 600. You will earn premium on sell Put Option and pay premium on buying Call Option. you are investing less but will benefit if SBI shares rises as per your expectations.

When to use Long Combo strategy?

Long Combo strategy should be deployed when you're Bullish on an underlying but don't have the required capital or the risk appetite to invest directly into it.

Example

Suppose SBI shares are currently trading at Rs 500. You are bullish on it but doesn't want to invest or have enough capital to do it. You can use Long Combo strategy here by selling a Put option of SBI at strike price of Rs 400 for a premium of Rs 25 and buying a Call Option at a strike price of Rs 600 for a premium of Rs 35. You will earn premium on sell Put Option and pay premium on buying Call Option.

SBI stock price	Rs 500
Option Lot Size	75
Short Put Option Strike Price	Rs 400
Premium Received	Rs 25
Long Call Option Strike Price	Rs 600
Premium Paid	Rs 35
Net Premium Paid	Rs 10
Break Even Point (Call Strike Price + Net Premium)	Rs 610

**Long Combo Option Strategy Payoff Schedule**
SBI Closing Price(Rs )	Short Put Option Payoff BEP = 375	Long Call Option Payoff (Rs ) BEP = 635	Net Payoff (Rs )
			Net Payoff
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 - Bullish

When you are expecting the price of the underlying to move up in near future.

Actions

Sell OTM Put Option
Buy OTM Call Option

Breakeven Point

Call Strike + Net Premium

Risk Profile of Long Combo

Long Combo is a high risk strategy. You will start losing money when the price of the underlying moves below the lower strike price. Your losses can be unlimited depending on how low the price of underlying falls.

Reward Profile of Long Combo

Long Combo is a high return strategy. You will earn profits if the underlying moves above the higher price of the underlying. Your profit will depend on how high the price of the underlying moves.

Max Profit Scenario of Long Combo

Underlying goes up and Call option exercised

Max Loss Scenario of Long Combo

Underlying goes down and Put option exercised

Advantage of Long Combo

Brings down the cost of investing in a Bullish stocks. And delivers high returns if prices move up.

Disadvantage of Long Combo

Losses can be high if prices don't move as expected.

How to exit?

When the price of the underlying rises, book profits.
Reverse the trade by buying the short option and selling the long option.

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