Definition
The term combination refers to an options strategy involving trades that take a position in both call and put options for the same underlying security. Option combinations allow investors to construct trades that balance risk and reward with their risk profile.
Explanation
While the term combination can refer to any grouping of financial contracts, it's oftentimes used when referring to options. Specifically, an options combination can refer to a strategy that consists of the purchase and / or sale of both calls and puts for the same underlying security. Collars and straddles are two examples of combinations.
Collars: involves the purchase of an out-of-the-money put, which protects the underlying securities from a loss due to a price decline and the sale of an out-of-the-money call, which helps offset the price paid when buying the put.
Straddles: involves the purchase of an equal number of call and put options, with the same expiration date, identical strike prices, and using the same underlying security. Straddles provide the investor with unlimited profit potential, while limiting risk.
Related Terms
- The term option cycle refers to three patterns that dictate when a commodity, currency, debt, index or equity option will expire. Rules established by the Chicago Board Options Exchange (CBOE) require each of these underlying assets to have four expiration months.
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The term contract size refers to the deliverable quantity of a commodity or security named as the underlying asset in a futures or options contract. The deliverable quantity, and therefore the contract size, for futures and options contracts are standardized but vary according to the underlying asset.
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The term contingency order refers to trades that are only executed if one or more conditions are satisfied. Contingency orders can include conditions such as the price of a security or the execution of another order.Moneyzine EditorNovember 6th, 2024
The term condor spread refers to an options strategy involving four calls with different strike prices and the same expiration date and underlying security. Condor spreads are considered a limited-risk trading strategy that allows investors to profit when the underlying security is considered non-volatile.Moneyzine EditorNovember 6th, 2024
