The Short Combo is the precise opposite of a Long Combo. Instead of nearly replicating the Long Stock (or Futures) position, we nearly replicate the Short Stock (or Futures) position by buying OTM puts and selling OTM calls.
The net result is a virtually nil cost or even net credit trade that has uncapped risk potential as the stock rises.
Buy an OTM (lower strike) put.
Sell an OTM (higher strike) call with the same expiration date.
Basics of Binary Option
Steps In
Try to ensure that the trend is upward and identify a clear area of resistance.
Steps Out
Manage your position according to the rules defined in your Trading Plan.
Play the strategy just as you would if you’d simply shorted the stock.
The difference is that with a Short Combo, you can leg out of the trade, maximizing your trading opportunity.
Never hold the Long option into the last month before expiration.
Context - Short Combo
Outlook
With Short Combos, your outlook is Bearish
Rationale
To simulate the action of shorting a stock.
This also simulates the action of taking a short position in a future except for the flat middle part between the strikes.
Net Position
This is usually a net credit trade. It can depend on how the strike prices are positioned compared to the stock price.
Your risk on the trade itself is uncapped on the upside as the stock rises.
Effect of Time Decay
Time decay helps your Short Combo trade, but with this strategy, you are hedging time decay by buying and selling near the money options, so the effect is minimal.
What you lose from the Long Put time value, you benefit from the Short Call position.
Appropriate Time Period to Trade
you will be using this strategy in conjunction with another trade.
It is generally more sensible to use this as a Shorter -term trade.
Breakeven
With net debits: [lower strike – net debit]
With net credits: [higher strike + net credit]
Exiting the Trade - Short Combo
Exiting the Position
With this strategy, you can simply unravel the spread by selling your puts and buying back the calls.
You can also exit just your profitable leg of the trade and hope that the stock moves to favor the unprofitable side later on.
Mitigating a Loss
Sell the position if the stock rise up through your predetermined stop loss.
Advantages and Disadvantages
Advantages
Create something similar to a Short stock position with virtually zero capital outlay and the ability to leg in and out of the call or put as appropriate.
Capped risk down to the stock falling to zero (though this could be argued the other way too; i.e., uncapped risk down to zero).
Uncapped profit potential if the stock appreciates.
Disadvantages
No leverage or protection created by the position.
Uncapped risk potential if the stock rises.
Bid/Ask Spread can adversely affect the quality of the trade.
