What is Long Combo Option Trading Strategy?

A Long Combo strategy is a well-known Bullish trading strategy. This options strategy is generally used when there is a degree of certainty about the rise of market prices. Essentially, it is an options trading strategy that is a mix of call options, as well as put options.

In a long combo trading strategy, essentially, a trader would sell an out-of-the-money OTM put option and buy an out-of-the-money (OTM) call option. Executing this strategy entails a fairly lower capital requirement since the cost of the call option is covered by the premium received on the put option

A rather complex options strategy, a long combo requires a trader’s proficiency at Options trading and an understanding of how their prices move with the underlying asset. More importantly, a trader should understand how to maneuver between selling an OTM put option and buying an OTM call option.

Example:

Consider that the ICICI shares are currently trading at Rs 500. You are bullish on it but are unable to invest due to capital constraints. You can use a long combo strategy here by selling a put option of the company, at a strike price of Rs 400 while simultaneously buying a call option at a strike price of Rs 600. In this case, you earn a premium on selling the put option and pay a premium on buying the call option. Although your investment is limited, you can benefit from this trade if ICICI share prices rise in tandem with your expectations.

When should you use a Long Combo Options Strategy?

A long combo strategy should be employed when the following factors co-exist:

• As a trader, you are bullish on the market
• You don't possess the required resources to invest – capital or

The leverage provided by a long combo strategy is extremely favorable and the maximum gains are unlimited. The trader will continue to earn profits till the price of the security keeps rising above the higher strike price. However, it is noteworthy that at the same time, the risks associated with this strategy are also unlimited. The trader will continue to lose money till the price of the security keeps falling to the lower strike price. Most traders who deploy this strategy, do not intend on remaining in the position till the option expires. Instead, they implement it to maximize leverage.

Advantages of a Long Combo Strategy

A few advantages that you can reap the benefit of when using a long combo strategy include:

• Providing leverage: In a long combo options strategy, the requirement of capital is low but the potential returns are high.

• Unlimited reward profile: The returns continually increase in alignment with stock price increments.

Disadvantages of a Long Combo Strategy

Having discussed the advantages of a long combo strategy, it is also important to know the not-so-sunny flipside.

• Unlimited risk profile: The returns continually decrease in alignment with stock price decrements.

• Premium loss: The premiums paid on the options, can add to the quantum of loss.

Final word

This is a relatively inexpensive trading strategy. You can ensure a successful trade by aligning the timing of trade and choosing the correct strike prices.