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
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.
