Covered Combination

AAA

DEFINITION of 'Covered Combination'

An option strategy that involves the simultaneous sale of an out-of-the-money call and a put with the same expiration date on a security owned by the investor. In other words, it is a combination of a covered call and a short put position. The strategy enables the investor to receive premium income through the sale of the call and the put, in exchange for taking on the risk of doubling his or her position in the stock should its price decline below the strike price of the put by the expiration date.

INVESTOPEDIA EXPLAINS 'Covered Combination'

For example, an investor who owns a stock S that is trading at $30 sells a call option on S with a strike price of $33 and simultaneously also sells a put option on S with a strike price of $28, with both the call and the put expiring in three months.


Covered combinations are used by investors who are moderately bullish on a stock and are comfortable with doubling their position in the event of a price decline. It is also used by investors who are looking for additional levels of premium income to enhance their rate of return on a stock or portfolio.

RELATED TERMS
  1. Short (or Short Position)

    1. The sale of a borrowed security, commodity or currency with ...
  2. Covered Call

    An options strategy whereby an investor holds a long position ...
  3. Out Of The Money - OTM

    A call option with a strike price that is higher than the market ...
  4. Put

    An option contract giving the owner the right, but not the obligation, ...
  5. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  6. Strangle

    An options strategy where the investor holds a position in both ...
Related Articles
  1. Introduction To Put Writing
    Options & Futures

    Introduction To Put Writing

  2. Cut Down Option Risk With Covered Calls
    Options & Futures

    Cut Down Option Risk With Covered Calls

  3. Use Married Puts To Protect Your Portfolio
    Options & Futures

    Use Married Puts To Protect Your Portfolio

  4. Using
    Options & Futures

    Using "The Greeks" To Understand Options

Hot Definitions
  1. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  2. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  3. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center