A Covered Combination is an option strategy wherein, an investor who owns a security, simultaneously sells equal number of calls and puts of the same underlying security with the same expiration date. This strategy is also known as a covered strangle.
When to use this strategy?
This strategy is used when the investor is moderately bullish on the underlying security.
How to build the strategy?
This strategy has three legs:
Leg 1 – Buy the underlying security, quantity being equivalent to the lot size of the options contract.
Leg 2 – Sell 1 OTM Call
Leg 3 – Sell 1 OTM Put
Credit Spread/Debit Spread
This is a Credit Spread Strategy.
The profit potential is limited in this strategy.
When is this strategy profitable?
The maximum profit is reached when the underlying price reaches the strike price of the call option.
The investor faces unlimited risk in this strategy.
When is this strategy unprofitable?
The investor can face large losses if the underlying security prices fall below the strike price of the put option.