Long Combo Strategy

Discussion in 'Options' started by johntsai90, Sep 7, 2009.

  1. Have anyone heard of this strategy?

    I am just wondering does anyone know their breakeven point?

    how to calculate them and whats benefits of using this strategy?
  2. 1) "Long Combo' is not a good choice of words. It usually refers to a position in which you are along a call and short a put with the same strike and expiration. It's equivalent to being long 100 shares of stock.

    2) I'll assume you are referring to a long 'straddle.'

    In that strategy you buy one all and buy one put - same strike price and expiration date.

    3) Don't spend too much time worrying about break-even points. Why? Because when you own a straddle, your goal is NOT to hold it until the options expire. Your goal is to sell it as quickly as possible - after the stock makes the big move you are expecting. If you do not expect a BIG move, do NOT buy a straddle.

    4) The break-even point are determined as follows.

    Add the cost of the put and call.

    a) Add that sum to the strike price. That is the stock price, above which, your position is profitable.

    b) Subtract that sum from the strike price. That's your break-even point on the downside. If the stock moves below that price, your position is profitable.

    5) Benefits to using this strategy? This is a losing strategy for the vast majority of investors. It requires that you not pay too much for the options, and as a rookie, I don't see how you can quickly determine if you are paying a fair price for the options.

    It also requires that the stock make a major move - in either direction. Enough of a move to overcome the premium you are paying for the options. These moves do occur, but not that frequently.

    If you plan to buy a straddle prior to a big new announcement - such as an earnings release, then you can expect to be paying top dollar (and then some) to buy the straddle.

    Best of luck

  3. Combo is short for combiination which could be any number of strategies. You might want to be a bit more specific about what strategy you are referring to. And if you don't know the specifics of what options make up a long combo strategy, what would be the point of knowing its breakeven points?