Read my review

Combinations

An options combination strategy is the simultaneous purchase of a call and a put on the same underlying asset with the same time to expiration. The two basic types of combos are:

  • Straddle
  • Strangle

A straddle is a combo call and put with the same strike price. The resulting payoff diagram looks like a V:

Options Strategy - Straddle Payoff

A strangle is a combo call and put with different strike prices. The result payoff diagram looks more protracted:

Options Strategy - Strangle Payoff

As you can see, they pretty much look the same, except that the straddle is more pronounced. Due to its wider potential for loss, the strangle is generally cheaper. However, neither combination offers what is needed for implementing the Darvas box theory. That last statement may sound counterintuitive: if we are risk averse, wouldn't a straddle or a strangle be a great way to play the Darvas method? Yes, if the following statements are also true:

  • You have sufficient capital to fund both legs of the combo (remember, both legs are on the long side)
  • You know for a fact that the stock will move significantly (doesn't matter which way)

The first statement is perhaps not such a problem. However, the second statement is what bothers me. There is no guarantee that the underlying stock will move any significant amount. In addition, if the volatility of the underlying is high, you are overpaying for the options (both legs). As a result, volatility works against you.

Because I am poor and risk averse, I prefer to put up as little money as possible and still play this strategy. Therefore, combos are out. However, if those issues are not important, then a combination could be feasible to use.

BoxCharts.com