Trading Options: Long Combo Trading Strategy

 

Trading Options - Long Combo Trading Strategy

By Nitin Thapar

Introduction

In my recent blogs about some of the most popular option trading strategies I talked about strategies that involve limited risks and rewards. The Strategies explained in my previous articles including Option Long Strangle, Bull Call Spread and Iron Condor have one thing in common, that it is for a cautious trader who wants to make minimum investment with low to medium level risk but with lower returns. Based on the feedback and demand this time I will be taking you through a strategy that involves unlimited risk and reward.

We will be learning about the ‘Long Combo Strategy’ today which is simple to understand and implement.

Trading Options: Long Combo Trading StrategyClick To Tweet

What Is Long Combo Trading Strategy?

As an Options trader you can consider using the Long Combo strategy if you are bullish about the market i.e. you are expecting the stock price to go up. It involves selling a Put and buying a Call option.

Strategy Characteristics

Moneyness of the options –

  • Sell 1 OTM Put (Lower Strike)
  • Buy 1 OTM Call (Higher Strike)

Maximum Profit: Unlimited

Maximum Loss: Unlimited (Lower Strike + Net Premium)

Breakeven: Higher Strike + Net Premium

How to implement this strategy?

To make it simpler I will execute this strategy in a live market scenario.

Let me implement this strategy on the Bank of Baroda Ltd stock Options (Symbol: BANKBARODA ). Considering the fact that I am bullish about this stock and I am assuming that since the stock price is at an all-time low (considering last 3 months) I am expecting it to go up due to some external factor(s).

Last 3 months stock price movement of BANKBARODA (source – Google Finance)

stock price movement of BANKBARODA

The stock price as of 5th March 2018 for Bank of Baroda Ltd. is INR 138.95.

Here is the option chain of Bank of Baroda Ltd. for the expiry date of 05th March 2018.

option chain of Bank of Baroda Ltd

I will be taking the following positions:

  • Sell 120 Put at INR 1.45
  • Buy 150 Call at INR 2.60

Bank of Baroda put chain

Bank of Baroda call chain

Source: nseindia.com

Here’s how the payoff for a series of underlying prices will look like:

payoff series

Now, let’s use the Python code to show you the payoff summary:

Long Call Payoff

def long_call(sT, strike_price, premium_paid):
    return np.where(sT > strike_price, sT - strike_price, 0)-premium_paid
# Stock price
spot_price = 138.95
# Long call
strike_price = 150
premium_paid = 2.60
# Stock price range of call at expiration
sT = np.arange(40,240,1)
long_call_payoff = long_call(sT, strike_price, premium_paid)
fig, ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT,long_call_payoff,color='g')
ax.set_title('Long 150 Strike Call')
plt.xlabel('Stock Price (sT)')
plt.ylabel('Profit and loss')
plt.legend()
plt.grid()
plt.show()

long call

Short Put Payoff

def short_put(sT, strike_price, premium_recived):
    return np.where(sT > strike_price, 0, sT- strike_price) + premium_received
# Stock price
spot_price = 138.95
# Short Put
strike_price = 120
premium_received = 1.45
# Stock price range of put at expiration
sT = np.arange(40,240,1)
short_put_payoff = short_put(sT, strike_price, premium_received)
fig, ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT,short_put_payoff,color='r')
ax.set_title('Short 120 Strike Put')
plt.xlabel('Stock Price (sT)')
plt.ylabel('Profit and loss')
plt.legend()
plt.grid()
plt.show()

short put

Long Combo Payoff

long_combo_payoff = long_call_payoff + short_put_payoff
fix , ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT,long_combo_payoff,color='b')
ax.set_title('Long Combo Payoff')
plt.xlabel('Stock Price')
plt.ylabel('Profit and loss')
plt.legend()
plt.grid()
plt.show()

long combo payoff

print max(long_combo_payoff)
print min(long_combo_payoff)
87.85000000000001
-81.14999999999999
long_combo_payoff = long_call_payoff + short_put_payoff
fix , ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT,long_combo_payoff,color='b')
ax.plot(sT,short_put_payoff,'--',color='r')
ax.plot(sT,long_call_payoff,'--',color='g')
ax.set_title('Long Combo Payoff')
plt.xlabel('Stock Price')
plt.ylabel('Profit and loss')
plt.legend()
plt.grid()
plt.show()

long combo chart

Next Step

If you are new to Option trading and want to learn the basics, you can read through our post on Basics Of Options Trading Explained to understand the characteristic of Options.

If you want to learn various aspects of Algorithmic trading then check out the Executive Programme in Algorithmic Trading (EPAT™). The course covers training modules like Statistics & Econometrics, Financial Computing & Technology, and Algorithmic & Quantitative Trading. EPAT™ equips you with the required skill sets to be a successful trader. Enroll now!

Disclaimer: All investments and trading in the stock market involve risk. Any decisions to place trades in the financial markets, including trading in stock or options or other financial instruments is a personal decision that should only be made after thorough research, including a personal risk and financial assessment and the engagement of professional assistance to the extent you believe necessary. The trading strategies or related information mentioned in this article is for informational purposes only.

Download Data File

  • Long+Combo.ipynb

Download Files