A long combo is done when the trader is bullish. For example, bullish on the USD-INR means that the trader expects the dollar to appreciate or strengthen vis-à-vis the rupee. Alternatively the trader expects that the rupee could weaken. If the dollar is going to strengthen, the simple answer will be to either buy USD-INR futures or to buy a call option. But what if you want to double your bets on the dollar? You can do that with a Long Combo. In a long combo what you do is that you buy and OTM call option and simultaneously sell an OTM put option. This is called a double bullish position and is normally done when the trader is extremely confident that the dollar is headed higher or is likely to strengthen. Let us check how the payoffs will work out in this case.

Buy Call

73.00

Prem

0.40

Strategy

Long Combo

USD-INR Spot

72.50/$

Sell Put

72.00

Prem

0.50

Double Break Even Point

Based on Net cost of the Combo

Price

Buy Call

Premium

Sell Put

Premium

Net Inflow

Call - ITM/OTM

Buy Call P/L

Put - ITM/OTM

Sell Put P/L

Net Pay-Off

68.00

73.00

0.40

72.00

0.50

0.10

OTM

-0.40

ITM

-3.50

-3.90

68.50

73.00

0.40

72.00

0.50

0.10

OTM

-0.40

ITM

-3.00

-3.40

69.00

73.00

0.40

72.00

0.50

0.10

OTM

-0.40

ITM

-2.50

-2.90

69.50

73.00

0.40

72.00

0.50

0.10

OTM

-0.40

ITM

-2.00

-2.40

70.00

73.00

0.40

72.00

0.50

0.10

OTM

-0.40

ITM

-1.50

-1.90

70.50

73.00

0.40

72.00

0.50

0.10

OTM

-0.40

ITM

-1.00

-1.40

71.00

73.00

0.40

72.00

0.50

0.10

OTM

-0.40

ITM

-0.50

-0.90

71.50

73.00

0.40

72.00

0.50

0.10

OTM

-0.40

ITM

-

-0.40

72.00

73.00

0.40

72.00

0.50

0.10

OTM

-0.40

ATM

0.50

0.10

72.50

73.00

0.40

72.00

0.50

0.10

OTM

-0.40

OTM

0.50

0.10

73.00

73.00

0.40

72.00

0.50

0.10

ATM

-0.40

OTM

0.50

0.10

73.50

73.00

0.40

72.00

0.50

0.10

ITM

0.10

OTM

0.50

0.60

74.00

73.00

0.40

72.00

0.50

0.10

ITM

0.60

OTM

0.50

1.10

74.50

73.00

0.40

72.00

0.50

0.10

ITM

1.10

OTM

0.50

1.60

75.00

73.00

0.40

72.00

0.50

0.10

ITM

1.60

OTM

0.50

2.10

75.50

73.00

0.40

72.00

0.50

0.10

ITM

2.10

OTM

0.50

2.60

76.00

73.00

0.40

72.00

0.50

0.10

ITM

2.60

OTM

0.50

3.10

76.50

73.00

0.40

72.00

0.50

0.10

ITM

3.10

OTM

0.50

3.60

77.00

73.00

0.40

72.00

0.50

0.10

ITM

3.60

OTM

0.50

4.10

What are the key inferences that we can draw from the above table.

· This is a dual bullish strategy in the sense that you are selling a lower put of 72 strike and also buying a higher call of 73 strike. While it gives bigger profits when the dollar strengthens, it also increases losses in case the dollar was to weaken.

· The trader in this case pays 0.40 as premium for buying the call option on the USD but also receives 0.50 as the premium for selling the put option on the USD-INR. Thus his net payoff on the combination is a positive inflow of 0.10. This pulls down the break even of the Long Combo 0.10 below the put strike of Rs.72; which is 71.90.

· At the USD price of 71.90, the above Long Combo breaks even. Above that level, the profits are unlimited as you go higher. But on the downside below 71.90, the losses can also escalate quite rapidly. That is something you need to conscious about and that is why this Long Combo strategy is to be always done with a strict stop loss only.

· What would have happened if the dollar appreciated to Rs.77/$. Had you only purchased a 73 call option, the net profit after costs would have been Rs.3.60. However, as we can see in the last row in the table above, by selling a lower put option, the trader has been able to enhance the profits to Rs.4.10. It is this trading alpha that the Long Combo is all about.

Now traders may wonder if they can improve their returns by buying a higher call option and paying a lower premium. Let us see how that will work in terms of payoff. Let us assume that instead of buying the 73 call at 0.40, the trader decides to buy the 74 call which is available at just Rs.0.10. This is how the payoff table will look like?

Buy Call

74.00

Prem

0.10

Strategy

Long Combo

USD-INR Spot

72.50/$

Sell Put

72.00

Prem

0.50

Double Break Even Point

Based on Net cost of the Combo

Price

Buy Call

Premium

Sell Put

Premium

Net Inflow

Call - ITM/OTM

Buy Call P/L

Put - ITM/OTM

Sell Put P/L

Net Pay-Off

68.00

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

ITM

-3.50

-3.60

68.50

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

ITM

-3.00

-3.10

69.00

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

ITM

-2.50

-2.60

69.50

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

ITM

-2.00

-2.10

70.00

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

ITM

-1.50

-1.60

70.50

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

ITM

-1.00

-1.10

71.00

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

ITM

-0.50

-0.60

71.50

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

ITM

-

-0.10

72.00

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

ATM

0.50

0.40

72.50

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

OTM

0.50

0.40

73.00

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

OTM

0.50

0.40

73.50

74.00

0.10

72.00

0.50

0.40

OTM

-0.10

OTM

0.50

0.40

74.00

74.00

0.10

72.00

0.50

0.40

ATM

-0.10

OTM

0.50

0.40

74.50

74.00

0.10

72.00

0.50

0.40

ITM

0.40

OTM

0.50

0.90

75.00

74.00

0.10

72.00

0.50

0.40

ITM

0.90

OTM

0.50

1.40

75.50

74.00

0.10

72.00

0.50

0.40

ITM

1.40

OTM

0.50

1.90

76.00

74.00

0.10

72.00

0.50

0.40

ITM

1.90

OTM

0.50

2.40

76.50

74.00

0.10

72.00

0.50

0.40

ITM

2.40

OTM

0.50

2.90

77.00

74.00

0.10

72.00

0.50

0.40

ITM

2.90

OTM

0.50

3.40

A cursory glance is enough to tell you that the maximum loss has been reduced in this case but then the maximum profit has also been reduced. The good thing is that due to the larger inflow in the above case, the break even has come still lower.

What are the key inferences that we can draw from the above table.

· This is a dual bullish strategy in the sense that you are selling a lower put of 72 strike and also buying a higher call of 74 strike. While it gives bigger profits when the dollar strengthens, it also increases losses in case the dollar was to weaken.

· The trader in this case pays 0.10 as premium for buying the 73 call option on the USD but also receives 0.50 as the premium for selling the put option on the USD-INR. Thus his net payoff on the combination is a positive inflow of 0.40. This pulls down the break even of the Long Combo 0.40 below the put sell strike of Rs.72; which is 71.60.

· At the USD price of 71.60, the above Long Combo breaks even. Above that level, the profits are unlimited as you go higher. But on the downside below 71.60, the losses can also escalate quite rapidly. That is something you need to conscious about and that is why this Long Combo strategy is to be always done with a strict stop loss only.

· What would have happened if the dollar appreciated to Rs.77/$. Had you only purchased a 74 call option, the net profit after costs would have been Rs.2.90. However, as we can see in the last row in the table above, by selling a lower put option, the trader has been able to enhance the profits to Rs.3.40. It is this trading alpha that the Long Combo is all about.

Now traders may also wonder if they can further reduce their risk by selling a lower put option. This will entail a lower premium inflow but it will certainly reduce my downside risk. Let us see how that will work in terms of payoff. Let us assume that instead of selling the 72 put at 0.50, the trader decides to sell the 71 put which is available at just Rs.0.20. This is how the payoff table will look like.

Buy Call

73.00

Prem

0.40

Strategy

Long Combo

USD-INR Spot

72.50/$

Sell Put

71.00

Prem

0.20

Double Break Even Point

Based on Net cost of the Combo

Price

Buy Call

Premium

Sell Put

Premium

Net Outflow

Call - ITM/OTM

Buy Call P/L

Put - ITM/OTM

Sell Put P/L

Net Pay-Off

68.00

73.00

0.40

71.00

0.20

0.20

OTM

-0.40

ITM

-2.80

-3.20

68.50

73.00

0.40

71.00

0.20

0.20

OTM

-0.40

ITM

-2.30

-2.70

69.00

73.00

0.40

71.00

0.20

0.20

OTM

-0.40

ITM

-1.80

-2.20

69.50

73.00

0.40

71.00

0.20

0.20

OTM

-0.40

ITM

-1.30

-1.70

70.00

73.00

0.40

71.00

0.20

0.20

OTM

-0.40

ITM

-0.80

-1.20

70.50

73.00

0.40

71.00

0.20

0.20

OTM

-0.40

ITM

-0.30

-0.70

71.00

73.00

0.40

71.00

0.20

0.20

OTM

-0.40

ATM

0.20

-0.20

71.50

73.00

0.40

71.00

0.20

0.20

OTM

-0.40

OTM

0.20

-0.20

72.00

73.00

0.40

71.00

0.20

0.20

OTM

-0.40

OTM

0.20

-0.20

72.50

73.00

0.40

71.00

0.20

0.20

OTM

-0.40

OTM

0.20

-0.20

73.00

73.00

0.40

71.00

0.20

0.20

ATM

-0.40

OTM

0.20

-0.20

73.50

73.00

0.40

71.00

0.20

0.20

ITM

0.10

OTM

0.20

0.30

74.00

73.00

0.40

71.00

0.20

0.20

ITM

0.60

OTM

0.20

0.80

74.50

73.00

0.40

71.00

0.20

0.20

ITM

1.10

OTM

0.20

1.30

75.00

73.00

0.40

71.00

0.20

0.20

ITM

1.60

OTM

0.20

1.80

75.50

73.00

0.40

71.00

0.20

0.20

ITM

2.10

OTM

0.20

2.30

76.00

73.00

0.40

71.00

0.20

0.20

ITM

2.60

OTM

0.20

2.80

76.50

73.00

0.40

71.00

0.20

0.20

ITM

3.10

OTM

0.20

3.30

77.00

73.00

0.40

71.00

0.20

0.20

ITM

3.60

OTM

0.20

3.80

A cursory glance is enough to tell you that the maximum loss has been impacted in this case as has the maximum profit. The final call on the strikes will have to be taken by looking at your unique requirements and also your risk appetite. The challenge here is that due to the outflow of premium in the above case, the break even has actually gone higher.

What are the key inferences that we can draw from the above table.

· This is a dual bullish strategy in the sense that you are selling a lower put of 71 strike and also buying a higher call of 73 strike. While it gives bigger profits when the dollar strengthens, it also increases losses in case the dollar was to weaken.

· The trader in this case pays 0.40 as premium for buying the 73 call option on the USD but also receives 0.20 as the premium for selling the put option on the USD-INR strike of 71. Thus his net payoff on the combination is an outflow of 0.20. This outflow pushes up the break even of the Long Combo 0.20 above the call buy strike of Rs.73; which is 73.20.

· At the USD price of 73.20, the above Long Combo breaks even. Above that level, the profits are unlimited as you go higher. But on the downside below 73.20, the losses can also escalate quite rapidly. That is something you need to be conscious about and that is why this Long Combo strategy is to be always done with a strict stop loss only.

· What would have happened if the dollar appreciated to Rs.77/$. Had you only purchased a 73 call option, the net profit after costs would have been Rs.3.60. However, as we can see in the last row in the table above, by selling a lower put option, the trader has been able to enhance the profits to Rs.3.80. It is this trading alpha that the Long Combo is all about.

Traders need to broadly remember that this strategy is only suitable for traders who can protect their downside risk with stop losses. Otherwise this currency strategy can hit you the wrong way in bad times when the dollar weakens.