By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. View our Privacy Policy for more information.
PreferencesDenyAccept
optionsplaybook.com 2 - Options Playbook

Long Combination

AKA SYNTHETIC LONG STOCK; COMBO

Long combination - Options Playbook

The strategy

Buying the call gives you the right to buy the stock at strike price A. Selling the put obligates you to buy the stock at strike price A if the option is assigned.

This strategy is often referred to as “synthetic long stock” because the risk / reward profile is nearly identical to long stock. 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. If the stock is below strike A at expiration, you’ll most likely be assigned on the put and be required to buy the stock.

Since you’ll have the same risk / reward profileas long stock at expiration, you might bewondering, “Why would I want to run acombination instead of buying the stock?” Theanswer is leverage. You can achieve the sameend without the up-front cost to buy the stock.

At initiation of the strategy, you will have some additional margin requirements in your account because of the short put , and 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.

Most people who run a combination don’t intend to remain in the position until expiration, so they won’t wind up buying the stock. They’re simply doing it for the leverage.

Options guys tips

It’s important to note that the stock price will rarely be precisely at strike price A when you establish this strategy. If the stock price is above strike A, the long call will usually cost more than the short put . So the strategy will be established for a net debit. If the stock 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. For instance, if a company that has never paid a dividend before suddenly announces it’s going to start paying one, it will affect call and put prices almost immediately. That’s because the stock price will be expected to drop by the amount of the dividend after the ex-dividend date. As a result, put prices will increase and call prices will decrease independently of stock price movement in anticipation of the dividend. 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. So keep an eye out for them if you’re considering this strategy.

The setup

  • Buy a call, strike price A
  • Sell a put, strike price A
  • The stock should be at or very near strike A

NOTE: Both options have the same expiration month.

Who should run it

All-Stars only

NOTE: The short put in this strategy creates substantial risk. That is why it is only for the most advanced option traders.

When to run it

Options Playbook image 1

You’re bullish.

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.

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.

Margin requirement

Margin requirement is the short put requirement.

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. So don’t forget to multiply by the total number of units when you’re doing the math.

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 the 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).

Recommended

Short call spread strategy - Options Playbook
Short Call

Selling the call obligates you to sell stock at strike price A if the option is assigned. When running this strategy, you want the call you sell to expire worthless. That’s why most investors sell out-of-the-money options ..

Learn More
Short or uncovered put - Options Playbook
Short Put

Selling the put obligates you to buy stock at strike price A if the option is assigned. When selling puts with no intention of buying the stock, you want the puts you sell to expire worthless. This strategy has a low profit potential if the stock remains above strike A at expiration...

Learn More
Short straddle option - Options Playbook
Short Straddle

A short straddle gives you the obligation to sell the stock at strike price A and the obligation to buy the stock at strike price A if the options are assigned. By selling two options, you significantly increase the income you would have achieved from selling a put or a call alone...

Learn More
Short strangle option - Options Playbook
Short Strangle

A short strangle gives you the obligation to buy the stock at strike price A and the obligation to sell the stock at strike price B if the options are assigned. You are predicting the stock price will remain somewhere between strike A and strike B, and the options you sell will expire worthless...

Learn More
Long combination - Options Playbook
Long Combination

Buying the call gives you the right to buy the stock at strike price A. Selling the put obligates you to buy the stock at strike price A if the option is assigned. This strategy is often referred to as “synthetic long stock” because the risk / reward profile is nearly identical to long stock...

Learn More
Short combination - Options Playbook
Short Combination

Buying the put gives you the right to sell the stock at strike price A. Selling the call obligates you to sell the stock at strike price A if the option is assigned. This strategy is often referred to as “synthetic short stock” because the risk / reward profile is nearly identical to short stock.

Learn More
Call ratio vertical spread - Options Playbook
Front Spread w/Calls

Buying the call gives you the right to buy stock at strike price A. Selling the two calls gives you the obligation to sell stock at strike price B if the options are assigned. This strategy enables you to purchase a call that is at-the-money or slightly out-of-the-money without paying full price.

Learn More
Put ratio vertical spread - Options Playbook
Front Spread w/Puts

Buying the put gives you the right to sell stock at strike price B. Selling the two puts gives you the obligation to buy stock at strike price A if the options are assigned. This strategy enables you to purchase a putth at is at-the-money or slightly out-of-the-money without paying full price.

Learn More
Double diagonal option - Options Playbook
Double Diagonal

At the outset of this strategy, you’re simultaneously running a diagonal call spread and a diagonal put spread . Both of those strategies are time-decay plays. You’re taking advantage of the fact that the time value of the front-month options decay at a more accelerated rate than the back-month options...

Learn More

"An easy-to-follow guide on options that's worth checking out if you want to be 100% clear you know what you're risking and stand to gain by playing options."

Matt Krantz, USA Today

Pages

Policies

HomeCategoriesOptions BasicRookie's CornerOption StrategiesManaging PositionsGlossaryAuthor
Cookies PolicyPrivate Policy

A FEW THINGS YOU SHOULD KNOW

No statement in this web site is to be construed as a recommendation to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, 125 S. Franklin Street, Suite 1200, Chicago, IL 60606 (investorservices@theocc.com ).