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A Long Combo is a Bullish strategy. If an investor is expecting the price of a stock to move up he can do a Long Combo strategy. It involves selling a lower strike (OTM) Put and buying a higher strike i.e OTM Call.
Long Combo strategy simulates the action of buying a stock or futures but at a fraction of the stock price. It is an inexpensive trade similar in pay-off to Long Stock—except there is a gap between the strikes.
This is a fairly complex options strategy. It requires that the trader knows how options move with the underlying, and more importantly, how selling out of the money (OTM) put options and buying out of the money (OTM) call options can have an impact on the trade. The secret to a successful trade is to ensure that the timing of the trades is done in tandem and that the correct strike prices are chosen. It is important to note that the risk is unlimited since you are selling a OTM Put option (anytime you sell a put option your risk is unlimited).
The stratey can work out very well. As the stock price of the underlying rises the strategy starts making profits as both the OTM Call and the OTM Put generate profits together. Let us try an understand Long Combo with an example.
When to use: Investor is Bullish on the stock.
Risk: Unlimited (Lower Strike + net debit)
Breakeven: Higher strike + net debit
A stock ABC Ltd. is trading at Rs. 450. Mr. XYZ is bullish on the stock. But does not want to invest Rs. 450. He does a Long Combo. He sells a Put option with a strike price Rs. 400 at a premium of Rs. 2. The net cost of the strategy (net debit) is Rs. 1.