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Combinations

Combinations involve holding positions in both call and put options simultaneously.

1. Straddle

  • Construction: Buy a call option and a put option with the same strike price and expiration date.
  • Objective: Profit from significant price movement in either direction.
  • Risk/Reward: Unlimited profit potential with limited maximum loss (the total premium paid).

2. Strangle

  • Construction: Buy a call option and a put option with different strike prices but the same expiration date.
  • Objective: Profit from significant price movement in either direction.
  • Risk/Reward: Unlimited profit potential with limited maximum loss (the total premium paid).

3. Strip

  • Construction: Buy one call option and two put options with the same strike price and expiration date.
  • Objective: Profit from significant price movement, with a bias towards a decline in the underlying asset's price.
  • Risk/Reward: Unlimited profit potential with limited maximum loss (the total premium paid).

4. Strap

  • Construction: Buy two call options and one put option with the same strike price and expiration date.
  • Objective: Profit from significant price movement, with a bias towards an increase in the underlying asset's price.
  • Risk/Reward: Unlimited profit potential with limited maximum loss (the total premium paid).
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