Combinations
Combinations are closely related to straddles. Both involve buying (or selling) a call and a put on the same stock, but the strike prices and/or expirations differ.
What Is a Combination?
- A combination involves the simultaneous purchase (or sale) of a call and a put on the same underlying security
- The call and put have different strike prices and/or different expiration months
- When the strike prices are different (the most common form), a combination is often called a strangle
Think of it this way: A combination is a "wider" straddle. The gap between the two strikes creates a broader zone where max loss occurs, but the strategy costs less upfront because both options are out of the money (OTM).
Long Combination (Buying a Combination/Strangle)
- Structure: Buy a call + buy a put on the same stock with different strike prices (typically the call strike is higher than the put strike)
- Market outlook: Expects high volatility, similar to a long straddle but requires a larger price move to profit
- Advantage: Cheaper than a long straddle because both options are typically OTM
| Component | Formula |
|---|---|
| Max gain (upside) | Unlimited |
| Max gain (downside) | Put strike - Total premiums paid |
| Max loss | Total premiums paid |
| Upside breakeven | Call strike + Total premiums |
| Downside breakeven | Put strike - Total premiums |
Example: Buy 1 XYZ Oct 55 call at 3 / Buy 1 XYZ Oct 45 put at 2
- Total premiums = $3 + $2 = $5
- Max loss = $5 (stock between $45 and $55 at expiration; both options expire worthless)
- Upside breakeven = $55 + $5 = $60
- Downside breakeven = $45 - $5 = $40
- The stock must move beyond $60 or below $40 to profit
Exam Tip: Gotchas
- Max loss on a long combination spans an entire range, not a single price point. If the stock stays anywhere between the two strikes at expiration, both options expire worthless and the buyer loses the full premium.
Short Combination (Selling/Writing a Combination/Strangle)
- Structure: Sell a call + sell a put on the same stock with different strike prices
- Market outlook: Expects low volatility; the stock stays between the two strike prices
- Advantage over short straddle: Wider profit zone (the stock can move more before hitting a breakeven)
| Component | Formula |
|---|---|
| Max gain | Total premiums received |
| Max loss (upside) | Unlimited |
| Max loss (downside) | Put strike - Total premiums received |
| Upside breakeven | Call strike + Total premiums |
| Downside breakeven | Put strike - Total premiums |
When max gain occurs: The stock is between the two strike prices at expiration; both options expire worthless and the writer keeps both premiums.
Exam Tip: Gotchas
- A short combination has unlimited risk on the upside (from the naked call) and substantial risk on the downside (from the naked put). The wider profit zone does not reduce risk; it only makes max gain easier to achieve.
Straddle vs. Combination Comparison
| Feature | Straddle | Combination (Strangle) |
|---|---|---|
| Strike prices | Same | Different |
| Expiration | Same | Same or different |
| Cost (long) | Higher (at-the-money options) | Lower (OTM options) |
| Max loss zone | Single point (at strike) | Range (between strikes) |
| Breakeven spread | Narrower | Wider |
| Move needed to profit | Smaller | Larger |
Exam Tip: Gotchas
- Same strike + same expiration = straddle. Different strike or different expiration = combination. That is the only distinction. The breakeven formulas follow the same logic, but use the respective call strike and put strike instead of a single shared strike.