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Covered Call Vs Long Combo Options Trading Strategy Comparison

Compare Covered Call and Long Combo options trading strategies. Find similarities and differences between Covered Call and Long Combo strategies. Find the best options trading strategy for your trading needs.

Covered Call Vs Long Combo

  Covered Call Long Combo
Covered Call Logo Long Combo Logo
About Strategy A Covered Call is a basic option trading strategy frequently used by traders to protect their huge share holdings. It is a strategy in which you own shares of a company and Sell OTM Call Option of the company in similar proportion. The Call Option would not get exercised unless the stock price increases. Till then you will earn the Premium. This a unlimited risk and limited reward strategy. Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income. A long Combo strategy is a Bullish Trading Strategy employed when a trader is expecting the price of a stock, he is holding to move up. It involves selling an OTM Put and buying an OTM Call. The strategy requires less capital as the cost of Call Option is covered by premium received from Put Option. Say SBI shares are currently trading at Rs 500. You are bullish on it but doesn't want to invest or have capital to do it. You can use Long Combo strategy here by selling a Put option of SBI at strike price of Rs 400 and buying a Call Option at a strike price of Rs 600. You will earn premium on sell Put Option and pay premium on buying Call Option. you are investing less but will benefit if SBI shares rises as per your expectations.
Market View Bullish Bullish
Strategy Level Advance Advance
Options Type Call + Underlying Call + Put
Number of Positions 2 2
Risk Profile Unlimited Unlimited
Reward Profile Limited Unlimited
Breakeven Point Purchase Price of Underlying- Premium Recieved Call Strike + Net Premium

When and how to use Covered Call and Long Combo?

  Covered Call Long Combo
When to use?

The covered call option strategy works well when you have a mildly Bullish market view and you expect the price of your holdings to moderately rise in future.

Long Combo strategy should be deployed when you're Bullish on an underlying but don't have the required capital or the risk appetite to invest directly into it.

Market View Bullish

When you are expecting a moderate rise in the price of the underlying or less volatility.

Bullish

When you are expecting the price of the underlying to move up in near future.

Action
  • Buy Underlying
  • Sell OTM Call Option

Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income.

  • Sell OTM Put Option
  • Buy OTM Call Option

Breakeven Point Purchase Price of Underlying- Premium Recieved
Call Strike + Net Premium

Compare Risks and Rewards (Covered Call Vs Long Combo)

  Covered Call Long Combo
Risks Unlimited

Maximum loss is unlimited and depends on by how much the price of the underlying falls. Loss happens when price of underlying goes below the purchase price of underlying.

Loss = (Purchase Price of Underlying - Price of Underlying) + Premium Received

Unlimited

Long Combo is a high risk strategy. You will start losing money when the price of the underlying moves below the lower strike price. Your losses can be unlimited depending on how low the price of underlying falls.

Rewards Limited

You earn premium for selling a call. Maximum profit happens when purchase price of underlying moves above the strike price of Call Option.

Max Profit= [Call Strike Price - Stock Price Paid] + Premium Received

Unlimited

Long Combo is a high return strategy. You will earn profits if the underlying moves above the higher price of the underlying. Your profit will depend on how high the price of the underlying moves.

Maximum Profit Scenario

Underlying rises to the level of the higher strike or above.

Underlying goes up and Call option exercised

Maximum Loss Scenario

Underlying below the premium received

Underlying goes down and Put option exercised

Pros & Cons or Covered Call and Long Combo

  Covered Call Long Combo
Advantages

It helps you generate income from your holdings. Also allows you to benefit from 3 movements of your stocks: rise, sidewise and marginal fall.

Brings down the cost of investing in a Bullish stocks. And delivers high returns if prices move up.

Disadvantage

Unlimited risk for limited reward.

Losses can be high if prices don't move as expected.

Simillar Strategies Bull Call Spread







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