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

Buy Put

72.00

Prem

0.50

Strategy

Short Combo

USD-INR Spot

72.50/$

Sell Call

73.00

Prem

0.40

Double Break Even Point

Based on Net cost of the Combo

Price

Buy Put

Premium

Sell Call

Premium

Net Outflow

Put - ITM/OTM

Buy Put P/L

Call - ITM/OTM

Sell Call P/L

Net Pay-Off

68.00

72.00

0.50

73.00

0.40

0.10

ITM

3.50

OTM

0.40

3.90

68.50

72.00

0.50

73.00

0.40

0.10

ITM

3.00

OTM

0.40

3.40

69.00

72.00

0.50

73.00

0.40

0.10

ITM

2.50

OTM

0.40

2.90

69.50

72.00

0.50

73.00

0.40

0.10

ITM

2.00

OTM

0.40

2.40

70.00

72.00

0.50

73.00

0.40

0.10

ITM

1.50

OTM

0.40

1.90

70.50

72.00

0.50

73.00

0.40

0.10

ITM

1.00

OTM

0.40

1.40

71.00

72.00

0.50

73.00

0.40

0.10

ITM

0.50

OTM

0.40

0.90

71.50

72.00

0.50

73.00

0.40

0.10

ITM

-

OTM

0.40

0.40

72.00

72.00

0.50

73.00

0.40

0.10

ATM

-0.50

OTM

0.40

-0.10

72.50

72.00

0.50

73.00

0.40

0.10

OTM

-0.50

OTM

0.40

-0.10

73.00

72.00

0.50

73.00

0.40

0.10

OTM

-0.50

ATM

0.40

-0.10

73.50

72.00

0.50

73.00

0.40

0.10

OTM

-0.50

ITM

-0.10

-0.60

74.00

72.00

0.50

73.00

0.40

0.10

OTM

-0.50

ITM

-0.60

-1.10

74.50

72.00

0.50

73.00

0.40

0.10

OTM

-0.50

ITM

-1.10

-1.60

75.00

72.00

0.50

73.00

0.40

0.10

OTM

-0.50

ITM

-1.60

-2.10

75.50

72.00

0.50

73.00

0.40

0.10

OTM

-0.50

ITM

-2.10

-2.60

76.00

72.00

0.50

73.00

0.40

0.10

OTM

-0.50

ITM

-2.60

-3.10

76.50

72.00

0.50

73.00

0.40

0.10

OTM

-0.50

ITM

-3.10

-3.60

77.00

72.00

0.50

73.00

0.40

0.10

OTM

-0.50

ITM

-3.60

-4.10

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

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

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

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

· What would have happened if the dollar depreciated to Rs.68/$. Had you only purchased a 72 put option, the net profit after costs would have been Rs.3.50. However, as we can see in the first row in the table above, by selling a higher call option, the trader has been able to enhance the profits to Rs.3.90. 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 lower put 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 72 put at 0.50, the trader decides to buy the 71 put which is available at just Rs.0.20. This is how the payoff table will look like?

Buy Put

71.00

Prem

0.20

Strategy

Short Combo

USD-INR Spot

72.50/$

Sell Call

73.00

Prem

0.40

Double Break Even Point

Based on Net cost of the Combo

Price

Buy Put

Premium

Sell Call

Premium

Net Inflow

Put - ITM/OTM

Buy Put P/L

Call - ITM/OTM

Sell Call P/L

Net Pay-Off

68.00

71.00

0.20

73.00

0.40

0.20

ITM

2.80

OTM

0.40

3.20

68.50

71.00

0.20

73.00

0.40

0.20

ITM

2.30

OTM

0.40

2.70

69.00

71.00

0.20

73.00

0.40

0.20

ITM

1.80

OTM

0.40

2.20

69.50

71.00

0.20

73.00

0.40

0.20

ITM

1.30

OTM

0.40

1.70

70.00

71.00

0.20

73.00

0.40

0.20

ITM

0.80

OTM

0.40

1.20

70.50

71.00

0.20

73.00

0.40

0.20

ITM

0.30

OTM

0.40

0.70

71.00

71.00

0.20

73.00

0.40

0.20

ATM

-0.20

OTM

0.40

0.20

71.50

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

OTM

0.40

0.20

72.00

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

OTM

0.40

0.20

72.50

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

OTM

0.40

0.20

73.00

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

ATM

0.40

0.20

73.50

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

ITM

-0.10

-0.30

74.00

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

ITM

-0.60

-0.80

74.50

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

ITM

-1.10

-1.30

75.00

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

ITM

-1.60

-1.80

75.50

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

ITM

-2.10

-2.30

76.00

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

ITM

-2.60

-2.80

76.50

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

ITM

-3.10

-3.30

77.00

71.00

0.20

73.00

0.40

0.20

OTM

-0.20

ITM

-3.60

-3.80

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 inflow in the above case, the break even of the put has come still higher which is good.

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

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

· The trader in this case pays out a premium of 0.20 as premium for buying the 71 put option on the USD but also receives 0.40 as the premium for selling the call option on the USD-INR 73 strike. Thus his net payoff on the combination is a positive inflow of 0.20. This pulls up the break even of the Short Combo 0.20 above the call sell strike of Rs.73; which is 73.20.

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

· What would have happened if the dollar depreciated to Rs.68/$. Had you only purchased a 71 put option, the net profit after costs would have been Rs.2.80. However, as we can see in the first row in the table above, by selling a higher call option, the trader has been able to enhance the profits to Rs.3.20. 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 higher call option. This will entail a lower premium inflow but it will certainly reduce any upside risk of the dollar appreciating sharply. Let us see how that will work in terms of payoff. Let us assume that instead of selling the 73 call at 0.40, the trader decides to sell the 74 call which is available at just Rs.0.10. This is how the payoff table will look like.

Buy Put

72.00

Prem

0.50

Strategy

Short Combo

USD-INR Spot

72.50/$

Sell Call

74.00

Prem

0.10

Double Break Even Point

Based on Net cost of the Combo

Price

Buy Put

Premium

Sell Call

Premium

Net Outflow

Put - ITM/OTM

Buy Put P/L

Call - ITM/OTM

Sell Call P/L

Net Pay-Off

68.00

72.00

0.50

74.00

0.10

0.40

ITM

3.50

OTM

0.10

3.60

68.50

72.00

0.50

74.00

0.10

0.40

ITM

3.00

OTM

0.10

3.10

69.00

72.00

0.50

74.00

0.10

0.40

ITM

2.50

OTM

0.10

2.60

69.50

72.00

0.50

74.00

0.10

0.40

ITM

2.00

OTM

0.10

2.10

70.00

72.00

0.50

74.00

0.10

0.40

ITM

1.50

OTM

0.10

1.60

70.50

72.00

0.50

74.00

0.10

0.40

ITM

1.00

OTM

0.10

1.10

71.00

72.00

0.50

74.00

0.10

0.40

ITM

0.50

OTM

0.10

0.60

71.50

72.00

0.50

74.00

0.10

0.40

ITM

-

OTM

0.10

0.10

72.00

72.00

0.50

74.00

0.10

0.40

ATM

-0.50

OTM

0.10

-0.40

72.50

72.00

0.50

74.00

0.10

0.40

OTM

-0.50

OTM

0.10

-0.40

73.00

72.00

0.50

74.00

0.10

0.40

OTM

-0.50

OTM

0.10

-0.40

73.50

72.00

0.50

74.00

0.10

0.40

OTM

-0.50

OTM

0.10

-0.40

74.00

72.00

0.50

74.00

0.10

0.40

OTM

-0.50

ATM

0.10

-0.40

74.50

72.00

0.50

74.00

0.10

0.40

OTM

-0.50

ITM

-0.40

-0.90

75.00

72.00

0.50

74.00

0.10

0.40

OTM

-0.50

ITM

-0.90

-1.40

75.50

72.00

0.50

74.00

0.10

0.40

OTM

-0.50

ITM

-1.40

-1.90

76.00

72.00

0.50

74.00

0.10

0.40

OTM

-0.50

ITM

-1.90

-2.40

76.50

72.00

0.50

74.00

0.10

0.40

OTM

-0.50

ITM

-2.40

-2.90

77.00

72.00

0.50

74.00

0.10

0.40

OTM

-0.50

ITM

-2.90

-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 think to note is that is that due to the outflow in the above case, the break even of the Short combo has become relatively unfavourable. That is something to note.

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

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

· The trader in this case pays out a premium of 0.50 as premium for buying the 72 strike put option on the USD but also receives 0.10 as the premium for selling the call option on the USD-INR 74 strike. Thus his net payoff on the combination is a cash outflow of 0.40. This is unfavourable for the break even of the Short Combo; 0.40 below the put buy strike of Rs.72; which is 71.60.

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

· What would have happened if the dollar depreciated to Rs.68/$. Had you only purchased a 72 put option, the net profit after costs would have been Rs.3.50. However, as we can see in the first row in the table above, by selling a higher call option, the trader has been able to enhance the profits marginally to Rs.3.60. That is not the kind of trading alpha that currency traders bargain for and may not be workable for the trader.