Explanation
A covered combination also known as covered combos is an investment strategy that entails selling an out-of-the-money (OTM) call and an out-of-the-money (OTM) put with the same expiry and purchasing the real commodity in cash or futures. Investors who use this technique may earn an extra income by selling both the call and the put. Because the gains are limited and the risk is theoretically limitless, it is also known as a Covered Strangle.
Risk:
Unlimited
Reward:
Limited
Construction
Buy 1 Nifty Future
Sell 1 OTM Call Option
Sell 1 OTM Put Option
| Option Type | Expiry Date | Strike Price | LTP | Action | No. Of Lots |
| CALL | 29/03/2023 | 17150.0 | 138.65 | Sell | 1 |
| FUTURES | 29/03/2023 | -NA- | 17046.9 | Buy | 1 |
| PUT | 29/03/2023 | 16850.0 | 121.4 | Sell | 1 |
Payoff Chart
| Market Expiry | Payoff 1 | Payoff 2 | Payoff 3 | Net Premium | Option PayOffAt Expiry |
| 16600.0 | 0.0 | -446.9 | -250.0 | 260.05 | -436.85 |
| 16650.0 | 0.0 | -396.9 | -200.0 | 260.05 | -336.85 |
| 16700.0 | 0.0 | -346.9 | -150.0 | 260.05 | -236.85 |
| 16750.0 | 0.0 | -296.9 | -100.0 | 260.05 | -136.85 |
| 16800.0 | 0.0 | -246.9 | -50.0 | 260.05 | -36.85 |
| 16850.0 | 0.0 | -196.9 | 0.0 | 260.05 | 63.15 |
| 16900.0 | 0.0 | -146.9 | 0.0 | 260.05 | 113.15 |
| 16950.0 | 0.0 | -96.9 | 0.0 | 260.05 | 163.15 |
| 17000.0 | 0.0 | -46.9 | 0.0 | 260.05 | 213.15 |
| 17050.0 | 0.0 | 3.1 | 0.0 | 260.05 | 263.15 |
| 17100.0 | 0.0 | 53.1 | 0.0 | 260.05 | 313.15 |
| 17150.0 | 0.0 | 103.1 | 0.0 | 260.05 | 363.15 |
| 17200.0 | -50.0 | 153.1 | 0.0 | 260.05 | 363.15 |
| 17250.0 | -100.0 | 203.1 | 0.0 | 260.05 | 363.15 |
| 17300.0 | -150.0 | 253.1 | 0.0 | 260.05 | 363.15 |
| 17350.0 | -200.0 | 303.1 | 0.0 | 260.05 | 363.15 |
| 17400.0 | -250.0 | 353.1 | 0.0 | 260.05 | 363.15 |
Covered Combination Option Trading Example
Assume that the Nifty 50 is currently trading at Rs. 16976.7 level and the investor/trader is long the underlying. To execute the covered combo option strategy, he will sell one 17150 out of the money (OTM) Call Option for a premium of Rs. 138 and one 16850 out of the money (OTM) Put Option for a premium of Rs. 121.
Scenario 1
If the nifty closes at Rs. 16500 at expiration, the investor will lose Rs. 47775 ((16500-17046) + (138) + (16500 - 16850 + 121) *75]
Scenario 2
If the Nifty ends at Rs. 17300 at expiry, the investor will earn Rs. 27225. {(-17300+17150+138) + (17300 - 17046) + (121)} *75.
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Also read Diagonal Bull Call Spread Explanation
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