Combo

The Combo or Synthetic Long Stock is a Directional Options Strategy that mirrors the risk profile of owning the Underlying (which is typically a stock). Combos are also known as Risk Reversals.

Combo strategies initiated by buying a call and selling a put at the same Strike Price. Usually the Strike selected is At The Money.

If the Underlying is above the Strike Price at Expiration, the put expires worthless but the call has Intrinsic Value which means it can be exercised profitably. If the Underlying is below the Strike Price, the Long Call will be worthless, but the Short Put will have Intrinsic Value and will is likely to be assigned.

The main benefit of a Combo or Synthetic Long Stock position is the leverage. The positions benefits from an increase in the Underlying, but do not require the same level of capital to initiate a position.

As with being Long of the Underlying stock, Volatility is less of a factor than with other Options strategies because it is positive for the Long Call but is negative for the Short Put, so the two cancel each other out. Similarly, Theta (time decay) is net neutral; for the the Long Call it is negative, but the Short Put it is positive.

A combo strategy can be likened to a Futures position in the Underlying due to the leverage available. One issue with Combos on illiquid stocks is the size of the bid/offer spread, which can increase the slippage costs significantly (and negatively impact profits as a result).

Combo strategies are risk defined because (like owning stock) the maximum loss is the price of the stock. With that said, it is important to note that because Combos are initiated for a far lower cost than conventional Long stock purchases, the implied leverage might incur a loss which is considerably larger in relative terms.