When an investor/trader is bullish on the stock, it is a bullish strategy. In this strategy as stock price rises, it starts making the profit.
For example, a stock ABC Ltd is trading at Rs 450, Mr XYZ is bullish on stock but does not want to invest Rs. 450, but want to earn a profit.
He opts Long combo strategy, Sells Put option with strike price Rs 400 at a premium of Rs 1 and buys a Call option of strike price 500 at a premium of Rs 2. The Net cost of strategy is Rs 1.
Strategy: Sell a Put + Buy a Call .
Now consider the following scenario
If the company ABC Ltd’s shares moved to 550 from Rs 450 (Current price) Mr.XYZ receives Rs 1 premium for selling Put option, now he has CallOption (buying rights) for buying at strike price Rs 500 at a premium of Rs 2.
(Net Pay off) Rs 49 = Rs 1 (Sell Put) + Rs 48(Net pay off Call purchased).
If the ABC Ltd’s shares closed at Rs 350, Net pay off from Put sold is Rs 49, Net pay off from Call purchased Rs 2. He lost Rs 51.
Both Rewards and risks are unlimited in this strategy.
This post first appeared on CallPut Option Trading Strategies| Bank Nifty Tips, please read the originial post: here