Introduced: Covered Combo Option Trading

Covered Combos is an option strategy that’s unique, but less well-known. The covered combo is actually two different trades that you’re more likely to see – a naked put and a covered call. If you want to learn a very powerful trading strategy that brings a lot of profit, you should know about how to trade unusual options activity

You can write a covered call against stocks that you currently own. Like all options, 100 shares equals one contract. For a one-time payment of cash (called premium), you can sell another person the right to purchase your stock for a specific price (strike) and by a particular date (expiration).

When the option expires and the stock price is higher than the strike price, you are obligated by the agreement to sell all of your shares for that price. In the event that the stock trades below this strike price, then the covered call becomes worthless. If you wish, you can choose to issue a new call at a future date.

In the opposite, when selling or writing a “naked put” (they are called that because they’re not hedged or written off by another position), you’re giving the other party the right to, but not an obligation, sell you 100 of the stock you’ve chosen at or before its expiration. This means that you are making an offer to buy another person’s shares within a set time period at a price specified (which is likely lower than what the stock trades for currently). In essence, you are acting like an insurance firm.

Like with a covered-call, you receive an upfront cash payment. So long as the price of the stock is above the strike, your put will expire worthless. This means you do not have to buy shares. You can then write another call and continue the process. You will still be required to purchase shares at the price specified if it closes under the strike price.

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