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LearningLong combination/ Risk Reversal/ Combo (same strike)

Short StraddleShort combination/ Risk Reversal/ Combo (same strike)

Tyler Krett

Wednesday, 14 December 2022

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Long combination/ Risk Reversal/ Combo (same strike)

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Option Strategies

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 profile as long stock at expiration, you might be wondering, “Why would I want to run a combination instead of buying the stock?” The answer is leverage. You can achieve the same end 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.

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Short StraddleShort combination/ Risk Reversal/ Combo (same strike)

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