Long Combo (Risk Reversal) Strategy Explained

What is a Long Combo?

Buy 1 OTM Call

Provides upside participation above the call strike.

Sell 1 OTM Put

Generates premium and creates an obligation to buy shares if assigned.

Mental model: “I am bullish enough to sell downside protection in order to help pay for upside exposure.”

Core structure

Leg	Action	Typical Strike	Expiration
1	Buy to Open Call	Above current stock price	Same
2	Sell to Open Put	Below current stock price	Same

When to use it

Situation	Fit?	Why
Strong bullish outlook	Good fit	The call benefits from a large rise.
Want lower upfront premium	Good fit	The short put helps finance the call.
Comfortable buying shares lower	Important	The short put may be assigned.
Want limited downside risk	Poor fit	Short-put risk can be substantial.
Expect sideways movement	Mixed	You may simply retain the net credit/debit with neither option deeply ITM.

Worked example

Assume a stock trades at $100.

Leg	Strike	Example Premium
Buy Call	$110	Pay $2.50 = -$250
Sell Put	$90	Receive $2.50 = +$250

Net Premium = $0

In this simplified example, the short put fully finances the long call.

What happens at expiration?

Stock Price	Approximate Result	Meaning
$130	+$2,000	The $110 call has $20/share intrinsic value.
$115	+$500	The call is modestly profitable.
$100	$0	Both options expire worthless in this zero-cost example.
$90	$0	Short put is at the strike.
$80	-$1,000	Short put is $10/share in the money.
$60	-$3,000	Loss grows as the stock falls.

Upside potential

Above the call strike, profit rises dollar-for-dollar with the stock.

Upside Profit ≈ (Stock Price - Call Strike) × 100 ± Net Premium

Maximum upside profit is theoretically unlimited.

Downside risk

Below the short-put strike, the short put creates losses similar to owning stock from that strike.

Approx. Maximum Loss if Stock → $0 = Short Put Strike × 100 - Net Credit

In this zero-cost example: $90 × 100 = $9,000

The Long Combo is not a limited-risk bullish strategy.

Two important strike thresholds

Below the Put Strike

Losses begin growing because the short put is in the money.

Above the Call Strike

Profits begin growing because the long call is in the money.

Between the two strikes, both options may expire worthless.

Long Combo vs. Synthetic Long Stock

Feature	Long Combo	Synthetic Long Stock
Call strike	Usually higher	Same as put strike
Put strike	Usually lower	Same as call strike
Middle zone	Yes	No stock-like flat zone
Stock-like payoff	Partial / separated	Very close
Downside risk	Large below put strike	Large below shared strike

Long Combo vs. Long Call

Feature	Long Combo	Long Call
Call premium cost	Offset by short put	Paid entirely
Upside	Strong	Strong
Downside risk	Large	Limited to premium
Assignment risk	Yes	No
Beginner suitability	Lower	Higher

Why traders call it a Risk Reversal

The strategy effectively exchanges one type of option exposure for another:

You sell downside protection through the short put.
You buy upside participation through the long call.

The phrase “Risk Reversal” does not mean risk disappears. It means the structure shifts option exposure from one side of the market to the other.

Assignment risk

The short put can be assigned before expiration.

If assigned, you may be required to buy 100 shares at the put strike while still holding the long call.

Capital and buying power

Even if the trade costs little or nothing in net premium, the short put may require substantial cash or margin.

Zero-cost does not mean zero-capital and does not mean zero-risk.

Pros and cons

Pros

Strong bullish upside potential.
Can be entered for low or zero net premium.
Flexible strike selection.
Useful when willing to buy stock at a lower price.

Cons

Large downside risk from the short put.
Assignment risk.
Buying-power requirement can be significant.
No profit between strikes in a zero-cost setup.
More complex than a Long Call.

How to close it

Close: Sell to Close the long call + Buy to Close the short put.

Closing both legs together helps preserve the intended risk profile.

Common mistakes

Thinking the short put is merely “free financing.”
Using the strategy on a stock you would not want to own.
Ignoring the large downside risk.
Failing to reserve enough capital for assignment.
Confusing it with a limited-risk spread.
Not planning for earnings or gap risk.

Beginner checklist

Check	Question
☐ Bullish thesis	Do I expect a meaningful move above the call strike?
☐ Put strike	Would I genuinely buy 100 shares at this level?
☐ Net premium	Is the trade a debit, credit, or near zero-cost?
☐ Downside risk	What happens if the stock falls sharply?
☐ Assignment	Can I handle short-put assignment?
☐ Buying power	Does my account support the obligation?
☐ Simpler alternative	Would a Long Call or Bull Call Spread be safer?

Key takeaway

Long Combo = Buy OTM Call + Sell OTM Put, Same Expiration

It is a strong bullish strategy that uses the short put premium to help finance the call.

The trade-off is straightforward: cheaper upside exposure in exchange for substantial downside obligation.