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.

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