A combination is any option strategy utilizing both call and put options. For the purposes of this chapter, a combination is typically long one side and short the other side, where both options work in the same direction. In contrast, in most spreads, the options are the same type (either all calls or all puts) and work in opposite directions (e.g., if you buy a call at a strike price and sell a call at a higher strike price).
A combination can be executed when there is a one-to-one ratio of options, it can be unbalanced (ratioed) when there is a different number of options on each side, and the options can expire in different months. To illustrate basic principles, this chapter assumes a combination in which there is one call for every put option, each option expires at the same time, both sides work in the same bullish or bearish direction, and you do not own the underlying stock. There can be many variations to a combination, so each should be analyzed separately to determine its own unique risks and rewards. A combination, such as a straddle or strangle, can consist of call and put options working in opposite directions, and you should refer to Chapter 14, “Straddle and Strangle,” for a complete discussion of those strategies.
This chapter provides an overview and comprehensive examples of long and short combinations and then addresses debit versus credit positions, rolling, and combination strategies on ETFs, indexes, and stock index futures.