Investment Type: Debit
Strike Prices:OTM for sold leg, ITM/ATM/OTM for bought leg
Expiration Month: current month for sold leg, current/later month for bought leg
Composition: Sell Call + Buy Put
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We perform Short Combo when we are really bearish on a stock and want to stretch our maximum profit in addition to Buy Put position; hence in addition, we Sell OTM Call and the strike price has to be different with the bought leg.
The risk profile resembles with shorting the stock itself but Short 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 Sold Leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) = ($4,000) + $3,000 = Credit ($1,000)
Breakeven Point = Strike Price of Bought Leg + Net Credit = $35.00 + $0.20 = $35.20
Exit:
Best Case Scenario:
Profit @ Exit = (Premium of Sold Leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) - Investment @ Entry = $0 + $12,500 – ($1,000) = $13,500
Return of investment = Profit @ Exit / Investment @ Entry = 1,350%
Worst Case Scenario : Unlimited Loss
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