Investment Type: Debit
Strike Prices: OTM for bought leg, ITM for sold leg
Expiration Month: current month for sold leg, current/later month for bought leg
Composition: Sell Put + Buy Call
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We perform Long Combo when we are really bullish on a stock and want to stretch our maximum profit in addition to Buy Call position; hence in addition, we Sell OTM Put and the strike price has to be different with the bought leg.
The risk profile resembles with buying the stock itself but Long Combo requires less investment, gives better breakeven point and more leverage (reward) if we are in the right direction. On the other side, we have expiration date to be aware of and lose privilege of limited risks that is associated with the bought leg.
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Entry:
Investment @ Entry = (Premium of Bought Leg x No of Contracts x 100 Shares) + (Premium of Sold Leg x No of Contracts x 100 Shares) = $4,000 + ($3,000) = $1,000
Breakeven Point = Strike Price of Bought Leg + Net Debit = $35.00 + $0.20 = $35.20
Exit:
Best Case Scenario:
Profit @ Exit = (Premium of Bought Leg x No of Contracts x 100 Shares) + (Premium of Sold Leg x No of Contracts x 100 Shares) - Investment @ Entry = $12,500 - $0 - $1,000 = $11,500
Return of Investment = Profit @ Exit / Investment @ Entry = 1,150%
Worst Case Scenario : Unlimited Loss
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