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.
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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)
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.
I will be taking the following positions:
- Sell 120 Put at INR 1.45
- Buy 150 Call at INR 2.60
Source: nseindia.com
Here’s how the payoff for a series of underlying prices will look like:
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()
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()
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()
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()
Next Step
If you are new to learning about options 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!
You can enroll for the options trading course on Quantra to create successful strategies and implement knowledge in your trading. It covers both retail and institutional trading strategies.
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
