Long Combination
AKA SYNTHETIC LONG STOCK; COMBO
The strategy
Buying the call gives you the right to buy the stock at strike price A. Selling the put obligates you to buy the stock at strike price A if the option is assigned.
This strategy is often referred to as “synthetic long stock” because the risk / reward profile is nearly identical to long stock. Furthermore, if you remain in this position until expiration, you will probably wind up buying the stock at strike A one way or the other. If the stock is above strike A at expiration, it would make sense to exercise the call and buy the stock. If the stock is below strike A at expiration, you’ll most likely be assigned on the put and be required to buy the stock.
Since you’ll have the same risk / reward profileas long stock at expiration, you might bewondering, “Why would I want to run acombination instead of buying the stock?” Theanswer is leverage. You can achieve the sameend without the up-front cost to buy the stock.
At initiation of the strategy, you will have some additional margin requirements in your account because of the short put , and you can also expect to pay a net debit to establish your position. But those costs will be fairly small relative to the price of the stock.
Most people who run a combination don’t intend to remain in the position until expiration, so they won’t wind up buying the stock. They’re simply doing it for the leverage.