Investors who expect stock price appreciation can use the Long Combo as a bull options investment strategy to gain beneficial stock pricing without exceeding the costs of actual stock purchase. Two options exist within this strategy: sellers obtain an out-of-the-money Put option with a low strike price while simultaneously buying an out-of-the-money Call option with a higher strike price.
How the Long Combo Strategy Works
With the OTM Put selling, the investor earns a premium, whereas with the OTM Call purchase, there is room for the upside. With increasing prices of the underlying share, the Call becomes more valuable, and the investor can earn profit. Both the Put and the Call options can be utilised to increase the total profit in the trade.
Risk and Reward
The long Combo strategy is of unlimited risk due to the short Put. When the stock price dips below the Put’s strike, the investor can be compelled to buy the stock at this price, resulting in huge losses. However, the profit is also unlimited since the profit potential is increased with a rise in the stock price.
Example
Let us assume that there is a share of ABC Ltd., which is trading at Rs. 450. Mr. XYZ is optimistic about this and writes a costly Rs. 2 Rs. 400 Put and buys a higher strike Call. The net cost of the strategy is Rs. 1.
Conclusion
The Long Combo strategy is an inexpensive means of capitalising on optimistic expectations, yet it has unlimited risk due to the short Put position. The trade is, therefore, to be conducted with care, particularly as it relates to time and choice of strike price.
