Combination

DEFINITION of 'Combination'

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.

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