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Covered Combination Option Strategy-Bullish Strategy

Covered-Combination-Option-Strategy

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.

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    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.

    For getting payoff chart, breakeven points, potential max loss/ gain while making a option trading strategies, traders can just sign up with Moneysukh and Log in to traderdar.moneysukh.com.

    Also read Diagonal Bull Call Spread Explanation

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