Long Combo

Overview

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 a lower strike (OTM) Put and buying a higher strike i.e OTM Call.

Long Combo strategy simulates the action of buying a stock or 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 an understand Long Combo with an example.

When to use: Investor is Bullish on the stock.

Risk: Unlimited (Lower Strike + net debit)

Reward: Unlimited

Breakeven: Higher strike + net debit

Example

A stock ABC Ltd. is trading at Rs. 450. Mr. XYZ is bullish on the stock. But does not want to invest Rs. 450. He does a Long Combo. He sells  a Put option with a strike price Rs. 400 at a premium of Rs. 2. The net cost of the strategy (net debit) is Rs. 1.

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