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Long Combo - An Option Trading Strategy.

In this article, we shall see the details about the long combo. A long combo option strategy is implemented when the traders expect that the price of the stock they are holding will rise soon.


A long combo is worth considering if you're looking for a great options trading strategy. This approach involves purchasing a call option while simultaneously selling a put option at the same strike price. By doing so, you can capitalize on upward and downward movements in the underlying asset's price.


Market outlook of the long combo:

Traders utilize this strategy when the market is Bullish, when it is expected to rise, and there is an excellent opportunity to make a profit.


How to enter the long combo option strategy?

In order to enter the long combo option strategy, the trader sells an out-of-the-money put option contract and buys the out-of-the-money call option contract. Traders will require a small amount of capital to enter the strategy. The premium amount paid to buy the call option will get covered by the premium received by selling a put option.

  • Buy OTM Call option contract

  • Sell OTM Put option contract


When to use the long combo strategy?

A long combo strategy can be implemented under below circumstances:

  • When the market is bullish or rising.

  • When you have less capital to invest in options.

  • When your risk-bearing capacity is low.


What are the benefits of implementing the Long combo option strategy?

There are two main benefits of implementing the long combo option strategy as follows:

  • The cost of investing in the bullish market is low using the long combo strategy.

  • It will yield a high profit if the price goes up.


How to exit from the strategy?

There are two ways to exit from the strategy:

  • Book your profit when the price of the underlying asset rises.

  • You can reverse the trade by purchasing the short option contract and selling the long option contract.


Illustration

Eg. Nifty is currently trading @ 5500. A Long combo can be created by selling Put Option for strike 5400 @ premium 60 and buying Call Option Strike 5600 @ premium 40 respectively. Investor will benefit if Nifty stays above 5600 levels.

Strategy

Stock/Index

Type

Strike

Premium Inflow

Long Combo

NIFTY (Lot size 50)

Sell Put

5400

60 (Inflow)

Buy Call

5600

40 (Outflow)

The Payoff Schedule and Chart for the above is Show below.


Payoff Schedule

NIFTY @Expiry

Net Payoff (Rs.)

5100

-7000

5200

-4500

5300

-2000

5380

0

5400

500

5500

500

5600

500

5700

3000

5800

5500

5900

8000

6000

10500


Long Combo - An Option Trading Strategy

In the above chart, the breakeven happens the moment Nifty crosses 5380. In such a strategy, risk and reward is unlimited.

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