What Is a Combination?

In options trading, a combination is a blanket term for any options trade that is constructed with more than one option type, strike price, or expiration date on the same underlying asset. Traders and investors use combinations for a wide variety of trading strategies because they can be constructed to provide specific risk-reward payoffs that suit the individual's 澳洲幸运5开奖号码历史查询:risk tolerance and p𝐆references and expectations for the current market environment.

How a Combination Works

Combinations are composed of more than one option contract. Simple combinations include option spread trades such as 澳洲幸运5开奖号码历史查询:vertical spreads, 澳洲幸运5开奖号码历史查询:calendar (or horizontal) spreads, and 澳洲幸运5开奖号码历史查询:diagonal spreads. More involved combinations include trades such as Condor or 澳洲幸运5开奖号码历史查询:Butterfly spreads wh⛄ich are actually combinations of two vertical spreads. Some spread trades do not have recognized name🥀s and may simply be referred to generically as a combination spread or combination trade.

Recognized combinations such as vertical spreads are often available to trade as a pre-defined grouping. But ✨customized combinations must be put together by the indivi𒊎dual trader and may require multiple orders to put them in place.

Depending on the individual's needs, option combinations can create risk and reward profiles which either limit risk or take advantage of specific options characteristics such as 澳洲幸运5开奖号码历史查询:volatility and 澳洲幸运5开奖号码历史查询:time decay. Options combination strategies take advantage of the many choices available in the options sဣeries for a giv𝔉en underlying asset. 

Combinations comprise a wide range of broad approaches, starting with relatively simple combinations of two options as in collars, to more difficult straddle and strangle trades. More advanced strategies include four options of two different types such as an 澳洲幸运5开奖号码历史查询:iron condor spread. These can further hone the risk and reward profiles to profit from more specific changes in the underlyinℱg asset's price, such as a low-volatility range-bound move.

The primary disadvantage of these complex strategies is increased commission costs. It is important for any trader to understand their broker's commission structure to see whether it is conducive to trading combinations.

Some combinations arꦫe regularly used by options market makers and other professional traders because the trades can be constructed to capture risk premiums while protecting their own ✨capital from extensive risk.

For any given 澳洲幸运5开奖号码历史查询:underlying asset, the individual trader, commercial market maker, or institutional investor likely has two principal goals. One goal is to speculate on the future movement of the asset's price (whether higher, lower, or that it stays the same). The second goal is to limit losses to a defined amount where possible. Risk protection ♕comes at the cost of potential reward, either by capping that reward or having a higher cost in premiums and commissions from the extra options involved.

Example of a Combination

To illustrate the concept of a combination it is useful to examine the construction of an example trade. The following example of an 澳洲幸运5开奖号码历史查询:iron butterfly trade shows how this combination of four option contracts comes together to form a single strategy, namely, capturing profit from a stock that doesn't move𒊎 outside a given range.

The investor using this combination believes that the price of the underlying asset will remain within a narrow range until the options expire. The iron butterfly is an excellent example to show the full spectrum of combinations possible because it consists of two more straightforward combinations set within the more complex butterfly structure. Specifically, it is a combination of two vertical spreads of differing types: a 澳洲幸运5开奖号码历史查询:bull put spread and a 澳洲幸运5开奖号码历史查询:bear call spread. These spreads may or may not 😼share a ce🌳ntral strike price.

An iron butterfly is a short options strategy created with four options consisting of two puts, two calls, and three strike prices, all with the same 澳洲幸运5开奖号码历史查询:expiration date. Its goal is to profit from l൩ow 🍌volatility in the underlying asset. In other words, it earns the maximum profit when the underlying asset closes at the middle strike price at expiration.

The iron butterfly strategy has limited upside and 澳洲幸运5开奖号码历史查询:downside risk because the high and low strike options, the wings, protect against significant moves in either direction. Due to this🍬 limited risk, its profit potential is also limited. The commission to place this trade can be a notable factor her🧜e, as there are four options involved, which will increase the fees.