Covered Combo trading is unique. It’s a lesser-known option trading technique. In reality, the Covered Combo is made up of the more popular covered call and naked put. 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
When you write a covered option, it is against stock that belongs to you. A contract of 100 shares is the same as all options. By selling someone the right (called a premium), in exchange for one cash payment, you give them the opportunity to buy your shares at a specified price by a set date.
If, at expiration, the stock trades above the strike-price then the call is exercised. This means that you must sell your shares to the buyer for the agreed price. When the option expires, if the price of the stock falls below the strike, it will become worthless. However, you retain the ownership of your shares.
A naked put is a contract that gives someone the option, but no obligation, of selling you 100 shares at a strike price before or on expiration. It means you offer to purchase another’s stocks within a timeframe (possibly lower than current stock prices) at a fixed price. Your role is akin to that of an insurance agency.
The cash premium is the same as with covered calls. If the stock price closes higher than the strike rate, then the put becomes worthless. To continue, you may write another option and follow the same process. The stock will close at a price below your strike price. In this case, you must purchase the stocks, but the purchase price you paid is deducted by the premium.