Long Combo

Long Combo

Post By - Manav Saini
Review By : Rohan Sharma
Updated on : October 24, 2021

Basics Concepts – Long Combo

Description – Long Combo

The Long Combo is a variation of the Long Synthetic Future. The only difference is that we sell OTM (lower strike) puts and buy OTM (higher strike) calls.
The net effect is an inexpensive trade, similar to a Long Stock or Long Futures position, except there is a gap between the strikes.
Sell an OTM (lower strike) put.
Buy an OTM (higher strike) call with the same expiration date.

Steps to Trading a Long Combo

Steps In

Try to ensure that the trend is upward and identify a clear area of support.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
Play the strategy just as you would if you’d simply bought the stock.
The difference is that with a long Combo, you can leg out of the trade, maximizing your trading opportunity.
Never hold the long option into the last month before expiration.

Context - Long Combo

Outlook

With Long Combos, your outlook is bullish.

Rationale

To simulate the action of buying a stock but to do so with a fraction of the cost.
This also simulates the action of taking a long position in a future except for the flat middle part between the strikes.

Net Position

This is usually a net debit trade.
It can depend on where the call and put strikes are in relation to the stock price.
Your risk on the trade is uncapped on the downside until the stock falls down to zero.

Effect of Time Decay

Time decay is harmful to your Long Combo trade, but with this strategy, you are hedging time decay by buying and selling near the money options, so the effect is minimal.
What you lose from the Long Call time value, you benefit from the Short Put position.

Appropriate Time Period to Trade

You will be using this strategy in conjunction with another trade.
It is generally more sensible to use this as a longer -term trade.

Breakeven

With net debits: [higher strike + net debit]
With net credits: [lower strike – net credit]

Exiting the Trade - Long Combo

Exiting the Position

With this strategy, you can simply unravel the spread by selling your calls and buying back the puts.
You can also exit just your profitable leg of the trade and hope that the stock moves to favor the unprofitable side later on.

Mitigating a Loss

Sell the position if the stock break down through your predetermined stop loss.

Advantages and Disadvantages

Advantages

Create something similar to a long stock position with virtually zero capital outlay.
Capped risk down to the stock falling to zero (though this could be argued the other way too; i.e., uncapped risk down to zero!).
Uncapped profit potential if the stock appreciates.

Disadvantages

No leverage or protection created by the position.
No dividend entitlement.
Bid/Ask Spread can adversely affect the quality of the trade.

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