Combination Meaning & Definition

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Definition of Combination

Combination is an option position with a call and put on the same underlying security with different strike prices expiration months of both.

Applying "Combination" to Securities Exams:

A combination, like a straddle, is the simultaneous purchase or sale of a call and a put on the same underlying stock with the same expiration date but with different strike prices.

An investor may establish a long combination when they feel that the stock will make a significant move in either direction. A long combination may be established as follows:

Long 1 XYZ May 70 call at 2
Long 1 XYZ May 60 put at 1

An investor may elect to purchase a combination instead of a straddle because the overall premium paid for the position will be less than the premium for a straddle. Although the overall risk with a long combination is less than that of the straddle, the stock will have to make a more significant move for the investor to be profitable. An investor who feels that the price of the underlying security will remain in a trading range may establish a short combination as follows:

Short 1 XYZ May 70 call at 2
Short 1 XYZ May 60 put at 1

An investor who sells a combination will receive less premium than an investor who sells a straddle, but will also be taking on less risk.