Options Trading Strategies: Bullish - Long Combo

Explanation

Long Combo Option Trading Strategy is implemented when a trader is bullish in nature and expects the stock price to rise in the near future. Here a trader will sell one ‘Out of the Money’ Put Option and buy one ‘Out of the Money’ Call Option. This trade will require less capital to implement since the amount required to buy the call will be covered by the amount received from selling the put.

Construction

Sell 1 ‘Out of the Money’ Put Option
Buy 1 ‘Out of the Money’ Call Option

Example

Suppose NIFTY is trading at 5200 levels, Mr. X wants to enter in a long combo strategy, he will sell one 5000 OTM Put Option for a premium of Rs. 25 & buy one 5400 OTM Call Option for a premium of Rs. 35. The lot size of NIFTY is 50. His net investment will be Rs. 500. [(35-25)*50]

Case 1: At expiry if NIFTY closes at 4800, then Mr. X will incur a loss of Rs. 20500. [{(4800-5200) + (25-35)}*50]

Case 2: At expiry if NIFTY closes at 5100, then Mr. X will make a loss of Rs. 5500. [(5100-5200) + (25-35)*50]

Case 3: At expiry if NIFTY closes at 5600, then Mr. X will make a profit of Rs. 9500. [{(200-35) + (25)}*50]

Payoff Chart