What is Long Combo Option Trading Strategy

What is Long Combo Option Trading Strategy

An immensely popular bullish trading technique is the long combo option. When there is some volatility speculation about the growth in market prices, this options method is typically employed. Essentially, it is an options trading strategy that combines call and put options. In a long combo option trading strategy, a trader would essentially sell an OTM put option and buy an OTM call option. Since the premium from the put option covers the cost of the call option, this strategy has a relatively smaller capital requirement.

A long combo is a highly complex options strategy that necessitates a trader's expertise in options trading and comprehension of how the prices of options move in tandem with the underlying asset. More crucially, a trader needs to know how to switch between buying and selling OTM call and put options.

Example

Take into account that ABC stock is now trading at Rs 500. Although you are optimistic about it, you are unable to invest because of financial limitations. Here, you can employ a long combination strategy by offering to sell the company's put option with a strike price of Rs 400 while concurrently purchasing the company's call option with a strike price of Rs 600. In this instance, you make money on the put option sale and spend money on the call option purchase. You may profit from this strategy even though your investment is negligible if the price of ABC shares increases in line with your projections.

When is a Long Combo Options Strategy Appropriate?

A long combo approach offers tremendously advantageous leverage, and the potential gains are limitless. The trader will keep making money as long as the security's price remains above the higher strike price. It's important to realise, though, that there are also limitless risks involved with this method. Until the security's price reaches the lower strike price, the trader will continue to lose money. As a result, the majority of traders who use this approach don't plan to hold the position until the option expires. They use it instead to increase leverage.

Benefits of Using a Long Combo Strategy

When adopting a long combo strategy, you can gain from a few advantages, such as:

  • Leveraging: A long combination options strategy has a minimum capital requirement but huge potential rewards.
  • Unlimited Reward Profile: The returns rise in accordance with increases in the stock price.

Disadvantages Of A Short Combo Strategy

After going through the benefits of a long combo strategy, it's crucial to understand its drawbacks.

  • Unlimited Risk Profile: The returns are always declining along with stock price declines.
  • Premium Loss: The amount of the loss may be increased by the premiums paid for the options.

Wrapping Up

This trading technique is cost-effective. By timing your trades correctly and selecting the correct strike prices, you can achieve a profitable transaction. If trading doesn't appeal to you, another option is to consider investing in upcoming IPOs. Whatever you decide, make sure you always have a Demat and trading account in your name. You cannot invest in the financial markets without one. Open a demat account with Motilal Oswal today in a matter of minutes.

 

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