Covered Combos represent a rare and less-known trading option strategy. This strategy is composed of two more common trades – covered calls and naked puts. 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
The covered call can be written using stock you already possess. The same applies to all option contracts. 100 shares are equal to one contract. A single one-time premium payment is required to sell your right for someone else to purchase the stock you own at a predetermined price.
If your stock’s price at expiration exceeds the strike, then you have to sell them. The covered call would be worthless at expiration if your stock was trading below the strike price.
You can also sell a put, which is called a “naked” option because there are no hedges or other positions to offset it. This gives the buyer the right but does not obligate them to sell 100 shares (or more) of an underlying stock for the strike price at expiration or within a specified time frame. The offer is to buy someone’s share within a given time frame at an agreed-upon price. In essence, your role is that of an insurer.
In the same way as with the covered option, you get a payment of cash. As long the stock remains above the target price, the option expires ineffective and there is no obligation for you to purchase shares. The option is yours to continue writing another put. When the stock price closes lower than the strike, then you’re obligated, even though your premium is reduced, to buy shares.