A trader enters a Combo trade by buying call and selling put or selling call and buying put options with the same expiration date and strike price. By doing so, the trader can simulate long stock positions or short stock positions. A long combo will have a pay off similar to that of long stock position and a short combo will have a payoff similar to that of short stock position.
An options trader enters a long combo by buying an ATM call and selling an ATM put option with the same expiration date and strike price. This is a Bullish Strategy that may allow an investor to profit from any upwards movement of the underlying stock. This strategy is often called a Synthetic long stock as its profit and loss profile is similar to that of long stock.
For use when investor anticipates:
Financial characteristics:
Objective:
Please Note: An account must meet the appropriate options approval level in order to sell options naked or for naked put options to be considered eligible for margin.
Suppose ABC stock is trading at $40 in May. An options trader sets up a synthetic long stock by buying a June 40 call for $150 and selling a June 40 put for $100. The net debit taken to enter the trade is $50.
If ABC stock rallies and is trading at $50 at expiration in June, the short June 40 put will expire worthless but the long June 40 call expires in the money and has an intrinsic value of $1000. Subtracting the initial debit of $50, the options trader's profit comes to $950. Comparatively, this is very close to the profit of $1000 for a long stock position.
At expiration in June, if ABC stock is instead trading at $30, the long June 40 call will expire worthless while the short June 40 put will be assigned (resulting in a long position with a $40 cost basis) and be worth negative $1000. Selling the long position at the market price of $30 will result in a $1000 loss and together with the initial $50 debit taken when entering the trade, the trader's loss comes to $1050. This amount closely approximates the $1000 loss of the corresponding long stock position.
An investor enters a short combo by buying an ATM put and selling an ATM call option with same expiration date and strike price. This is a Bearish Strategy that may allow an investor to profit from any downward movement of the underlying stock. This strategy is often termed as Synthetic short stock as its profit and loss profile is similar to that of short stock.
For use when investor anticipates:
Financial characteristics:
Objective:
Please Note: An account must meet the appropriate options approval level in order to sell options naked.
Suppose ABC stock is trading at $50 in May. An options trader sets up a synthetic short stock by buying a June 50 Put for $100 and selling a June 50 Call for $150. The net credit taken to enter the trade is $50.
If ABC stock falls and is trading at $40 at expiration in June, the short June 50 call will expire worthless but the long June 50 Put expires in the money and has an intrinsic value of $1000. Adding the initial credit of $50, the options trader's profit comes to $1050. Comparatively, this is very close to the profit of $1000 for a short stock position.
At expiration in June, if ABC stock is instead trading at $60, the Long June 50 Put will expire worthless while the short June 50 Call will be assigned (resulting in a short position with a $50 cost basis) and be worth a negative $1000. Buying back this short position at the market price of $60 will result in a $1000 loss and together with the initial $50 credit taken when entering the trade, the trader's loss comes to $ 950. This amount closely approximates the $1000 loss of the corresponding short stock position.
Commissions, taxes, and transaction costs are not included in any of these strategy discussions, but can affect final outcome and should be considered. Please contact a tax advisor to discuss the tax implications of these strategies. Many of the strategies described herein require the use of a margin account. With long options, investors may lose 100% of funds invested. In-the-money long puts need to be closed out prior to expiration, since exercising them could create short stock positions.
Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Multiple leg options strategies will involve multiple commissions. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options." Member SIPC
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