Covered Combination


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.

BREAKING DOWN '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.

  1. Out Of The Money - OTM

    A call option with a strike price that is higher than the market ...
  2. Short (or Short Position)

    A short position is the sale of a borrowed security, commodity ...
  3. Covered Call

    An options strategy whereby an investor holds a long position ...
  4. Strike Price

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

    An options strategy where the investor holds a position in both ...
  6. Put

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