Combination (options)

In options trading, a combination is a position made up of a call and a put on the same underlying stock where the two contracts differ in strike price, expiration date, or both. This is what separates a combination from a straddle: a straddle uses a call and a put with the same strike and expiration, while a combination mixes them.

A long combination means buying both the call and the put. For example, an investor might buy an ABC Jan 55 call and an ABC Jan 45 put. The position profits if the stock makes a large move in either direction — above the call strike or below the put strike — and loses the combined premium if the stock stays between the two strikes. A short combination sells both contracts, collecting premium and profiting when the stock stays in a narrow range.

Traders choose combinations over straddles to fine-tune cost and breakevens. Because the call and put in a long combination are typically out of the money, the position usually costs less than a comparable straddle, but it requires a bigger price move to become profitable. Like straddles, combinations are volatility plays: long positions want movement, short positions want stability.

Note that a combination in options is unrelated to the combinations formula in math, which counts the number of ways to choose items from a group. On the Series 7 exam, expect questions asking you to distinguish combinations from straddles, calculate maximum gain and loss, and identify the market outlook (volatile vs. neutral) each position implies.