Combination of options
Selling the put obligates you to buy the stock at strike price A if the option is assigned. Furthermore, if you remain in this position until expiration, you will probably wind up buying the stock at strike A one way or the other.
If the stock is above strike A at expiration, it would make sense to exercise the call and buy the stock. You can achieve the same end without the up-front cost to buy the stock.
It can be constructed by buying an equal number of at-the-money call and put options with the same expiration date. Strangle Like the straddle, the strangle is also a strategy that has limited risk and unlimited profit potential. The difference between the two strategies is that out-of-the-money options are purchased to construct the strangle, lowering the cost to establish the position but at the same time, a much larger move in the price of the underlying is required for the strategy to be profitable. Strip The strip is a modified, more bearish version of the common straddle.
At initiation of the strategy, you will have some additional margin requirements in your account because of the short putand you can also expect to pay a net debit to establish your position. But those costs will be fairly small relative to the price of the stock.
If the stock price is above strike A, the long call will usually cost more than the short put.
Call & Put Buying Combinations
So the strategy will be established for a net debit. If the combination of options price is below strike A, you will usually receive more for the short put than you pay for the long call.
So the strategy will be established for a net credit. Remember: The net debit paid or net credit received to establish this strategy will be affected by where the stock price is relative to the strike price.
Dividends and carry costs can also play a large role in this strategy. As a result, put prices will increase and call prices will decrease independently sources of remote earnings stock price movement in anticipation of the dividend.
- Long Combination | Synthetic Long Stock - The Options Playbook
- By Lucas Downey Updated May 29, Traders often jump into trading options with little understanding of the options strategies that are available to them.
- Bullish strategies[ edit ] Bullish options strategies are employed when the options trader expects the underlying stock price to move upwards.
If the cost of puts exceeds the price of calls, then you will be able to establish this strategy for a net credit. The moral of this story is: Dividends will affect whether or not you will be able to establish this strategy for a net credit instead of a net debit. That is why it is only for the most advanced option traders.
Break-even at Expiration Strike A plus the net debit paid or minus the net credit received to establish the strategy. The Sweet Spot You want the stock to shoot through the roof.
AKA Synthetic Long Stock; Combo
Maximum Potential Profit There is a theoretically unlimited profit potential if the stock price keeps rising. Maximum Potential Loss Potential loss is substantial, but limited to strike price A plus the net debit paid or minus net credit received. Ally Invest Margin Requirement Margin requirement is the short put requirement.
- 10 Options Strategies to Know
- Updated Jan 16, What Is a Combination?
- Iron Condor Options Combinations Explained Options spreads involve the purchase or sale of two or more options covering the same underlying stock or security ref.
NOTE: If established for a net credit, the proceeds may be applied to the initial margin requirement. After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase or decrease in the required margin is possible.
Keep in mind this requirement is subject to change and is on a per-unit basis. As Time Goes By For this strategy, time decay is somewhat neutral. It will erode the value of the option you bought bad but it will also erode the value of combination of options option you sold good.
Implied Volatility After the strategy is established, increasing implied volatility is somewhat neutral. It will increase the value of the option you sold bad but it will also increase the value of the option you bought good. Use the Technical Analysis Tool to look for bullish indicators.