Tim Olson
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37 lines
1.4 KiB
Markdown
37 lines
1.4 KiB
Markdown
---
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description: "A bullish capital-gain strategy (long risk reversal) buying an OTM call at K1 and selling an OTM put at K2 < K1, profiting from a strong upward move."
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tags: [options, speculation, bullish, risk-reversal]
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---
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# Long Combo
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**Section**: 2.12 | **Asset Class**: Options | **Type**: Speculation
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## Overview
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The long combo (a.k.a. "long risk reversal") amounts to buying an OTM call option with strike K1 and selling an OTM put option with strike K2, where K1 > K2. The trader's outlook is bullish. This is a capital gain strategy.
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## Construction
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- Buy 1 OTM call option at strike K1
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- Sell 1 OTM put option at strike K2 (K2 < K1), same expiry
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Net debit or credit H (H = D if net debit, H = -C if net credit; K1 > K2)
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## Payoff Profile
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f_T = (S_T - K1)+ - (K2 - S_T)+ - H
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Breakeven depends on sign of H:
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- S* = K1 + H (if H > 0, net debit)
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- S* = K2 + H (if H < 0, net credit)
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- K2 <= S* <= K1 (if H = 0, zero-cost)
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- Max profit: P_max = unlimited
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- Max loss: L_max = K2 + H
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## Key Conditions / Signals
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- Strongly bullish outlook
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- Traders often structure as zero-cost (H = 0) by selecting K1 and K2 such that premiums offset
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- Profits from a large upward move; loses if stock falls below K2
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## Notes
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Unlike the long synthetic forward (where K1 = K2 = S0), the long combo uses out-of-the-money strikes on both legs, creating a gap zone [K2, K1] where the payoff is flat (equal to -H). Downside is limited to K2 + H if S_T goes to zero.
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