Combination

What does 'Combination' mean

Combination is the act of combining two or more financial instruments or businesses. In the financial context, the term "combination" generally refers to an option trading strategy that involves the purchase and/or sale of both call and put options on the same asset. Option combinations are popular with experienced traders and investors because they can be tailored to provide specific risk-reward payoffs that suit the investor's individual risk tolerance and preferences.

BREAKING DOWN 'Combination'

Option combinations span a wide range of broad strategies, from collars and fences to straddles and strangles. There are then more specific strategies as the iron condor, which involves buying and holding four different options with different strike prices. One disadvantage of such strategies, however, is the commission costs incurred and trading spreads, especially for more complex strategies that involve the simultaneous purchase and sale of a number of options.

RELATED TERMS
  1. Strangle

    An options strategy where the investor holds a position in both ...
  2. Iron Condor

    An advanced options strategy that involves buying and holding ...
  3. Leg

    A leg is one component of a derivatives trading strategy, in ...
  4. Call Ratio Backspread

    A very bullish investment strategy that combines options to create ...
  5. Horizontal Spread

    An options strategy involving the simultaneous purchase and sale ...
  6. Long Leg

    The part of an option spread strategy that involves buying an ...
Related Articles
  1. Options & Futures

    Get Familiar with These 6 Option Strategies

    When you’re ready to move beyond the basics of investing, it’s time to learn your options.
  2. Professionals

    Straddles and Strangles

    CFA Level 1 - Straddles and Strangles. Discusses how strangles and straddles are used by traders. Shows how to create these positions using put and call options on stocks.
  3. Options & Futures

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  4. Trading Strategies

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  5. Fundamental Analysis

    4 Popular Options Strategies for 2016

    Learn how long straddles, long strangles and vertical debit spreads can help you profit from the volatility that stock analysts expect for 2016.
  6. Options & Futures

    4 Options Strategies To Know

    Here is a quick introduction to four options strategies that traders should know.
  7. Options & Futures

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  8. Professionals

    Options

    Options
  9. Forex Education

    7. Long Strangle

    If you want to trade options but are short on strategies, we can help.
  10. Options & Futures

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
RELATED FAQS
  1. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
  2. What options strategies are best suited for investing in the financial services sector?

    Learn the options strategies top traders use to take advantage of the volatility in the financial services sector and the ... Read Answer >>
  3. What options strategies are best suited for investing in the aerospace sector?

    Learn how investors profit from volatility in the aerospace sector by employing options strategies, which include the long ... Read Answer >>
  4. When does one sell a put option, and when does one sell a call option?

    The incorporation of options into all types of investment strategies has quickly grown in popularity among individual investors. ... Read Answer >>
  5. What is spread hedging?

    Learn about one of the most common risk-management strategies options traders use, called spread hedging, to limit exposure ... Read Answer >>
  6. What options strategies are best suited for investing in the retail sector?

    Learn how savvy investors employ options strategies such as the long straddle and long strangle to profit from the volatile ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center