A combination, as discussed in Chapter 20, is any option strategy utilizing both call and put options. This chapter examines a combination that is established by selling a call and selling a put, in which the underlying stock is owned (covered combination ). A covered combination is a combination in which the underlying stock is owned. There can be many variations to a covered combination, so each should be analyzed separately to determine its own unique risks and rewards. The word covered simply means that the underlying stock is owned and does not mean, for the purposes of this chapter, that all losses are offset by an opposing position.
This chapter will analyze a covered combination using a covered short strangle (a short strangle in which the stock is owned) as an example. A covered short strangle can be executed when there is a one-to-one ratio of calls written versus puts written, or it can be ratioed (unbalanced) with a different number of calls versus puts. To illustrate some basic principles, this chapter will assume that one call option is written for every put written, all options have the same expiration date, and the stock is owned in proportion to the number of options. This chapter provides an overview and comprehensive example and then addresses an unbalanced short covered strangle, rolling, covered long straddle, and other issues.
A covered (short) strangle consists of a long stock, a short call, and a short put. In ...