Long Combination


The Long Combo is a debit spread involving the purchase of Puts and Calls on the same underlying with the same expiration but with different strike prices.  The Long Combo is similar to a straddle in that the investor expects a big move in the underlying but is unsure of the direction the underlying will make.  This is a great trade once again to initiate before expected news, such as quarterly reports.  An investor generally wants to select an underlying that historically has moved on quarterly news reports.  The Long Combo has limited risk and unlimited return potential.  The trade looks like this:

An investor is unsure of the direction BVF will take once news breaks, but feels there will be a substantial move.  The investor decides to buy 10 BVF $22.50 Calls @ $0.50 and buys 10 BVF $17.50 Puts @$0.50 for a total cost and risk of $1 or $1,000.00 for the total cost of the trade.  BVF is currently trading at $20.  It is best to implement this trade while volatility is low.   The upside breakeven on the trade is $23.50 (Call strike plus total premium paid) and the downside breakeven is $16.50 (Put strike less total premium paid).  The investor has unlimited upside return potential above $23.50 and gain potential to zero once the stock is below $16.50.  This trade requires a greater move in the underlying than the Straddle, but the advantage is that is a lower cost trade to enter.