A combination trade is a type of spread where multiple underlying assets are bought and sold simultaneously. These trades aim to generate profits from the fluctuation in the value of asset prices or their different price rates. Let’s explore a few simple techniques for this strategy that includes: the long straddle, short strangle, collar play, and zero-cost collar.
How to use combination trades effectively
When constructing combination trades, there are a few things you have to remember to use effectively. Always use stop-loss orders to protect your investment because no strategy is foolproof. When choosing the assets you want to trade, you must know how much risk exposure one asset can provide. This will help you understand how many combinations are available for that particular trade. It’s also important to keep in mind that the primary goal of these trades is not necessarily profit but risk management.
How do combination trades work?
No brokerage in the stock market only offers a single price for each share. Not even any two brokers will offer the same prices for the same stocks all the time. This means that you can profit by ‘combining’ different prices from different places and buying/selling where you get the best deal.
The vital thing when combining is not to lose sight of your final goal: which in this case is to buy at the lowest possible price and sell at the highest possible price to maximise your profit.[Important note about risk management]If you combine orders, the broker will execute your purchase and sale orders together as a single transaction. This means that if one side of the trade fails (e.g. because it cannot be filled at an acceptable price), neither contract will be executed.
A common misconception is that once you have placed a combination order, the whole lot will immediately go into the market and start trading with real money immediately after placing your order. However: in many cases, only part of your combined order may hit the market immediately, and other parts might never actually get traded live. This depends on how much buying/selling interest there is in the particular stock you are trading, how much buying/selling pressure there is in the market at any given time etc.
Always be wary about executing too many combinations every day, as your broker might give you restrictions on how many combinations per contract/stock group they will execute for you each month.
Risks associated with combination trading
The most common risk associated with combo trading is at the source level. The two stocks being traded are both issued by the same company. If that company wasn’t doing well financially, it could lead to difficulties with one or both of your stocks, which means that your strategy is no longer profitable. The best way to avoid this risk would be to ensure that the two companies are not related in any way before investing in either stock involved in your trade.
Another concern investors have when trading combos knows where to place their stop-loss orders. Since combo trades involve several different transactions, each with risks and rewards, many traders aren’t sure how much money can be lost before exiting a position. To make matters worse, exit points for break-even on combos are often hard to determine due to the sheer number of transactions involved.
Combination trades are an excellent way for investors to diversify their portfolios without compromising profitability. Combination trades are an investment tool that has been used by traders around the world for years and will most likely continue to be a valuable strategy for investors dealing with fluctuating markets. It is recommended that new investors use reputable online brokers such as Saxo Hong Kong to help them through the pitfalls of trading. Start trading on a demo account before investing your own money.