COF – Combination For Free

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Introduction to the investment strategy

This is an options strategy built around calendar or diagonal butterflies. The underlying instruments are individual US stocks and ETFs. Every position consists initially of a combination of two components; short a front month ATM straddle and long a deferred month OTM combination. The position is a net credit position.

The purpose of the short straddle is to finance the long combination, hence COF – Combination For Free. The short straddle is closed when it can be re-purchased, typically through time decay, at a cost below the net credit initially received. When this is achieved, the long combination is for free.

In terms of Option Greeks, the strategy has, before the front month expiry, in general positive vega/theta, negative gamma and neutral delta.

Portfolio composition – how are the positions determined?

All optionable US stocks and ETFs are screened for opportunities. Underlyings and their corresponding options that pass the screen have a high credit vs debit ratio and a high credit vs risk ratio. No positions are opened in stocks that have an earnings release scheduled before the front expiry.

There are generally less than five open positions in every front/deferred pair.

Entry/exit – when are the positions changed?

Portfolio updates are determined on a daily basis.


The exposure is determined relative to risk. A risk budget is set for the portfolio and every position uses a part of the risk budget.

Risk Management

From the outset of every position the maximum risk of loss is established. This means that in every point in time it is known how much the portfolio stands to lose at worst.

There is an active profit taking mechanism that uses option rolls to capture and retain profits.

Results – what to expect?

As the short straddle loses value due to time decay faster than the long combination, the result will be a number of free combinations, over a market cycle. These free and long combinations will occasionally produce significantly profitable trades that far outweigh the losses that occur due to moves before the front month expiry.

It is particularly favorable to regularly adjust the risk budget with realized profits/losses.

Risk – which types of market environments are detrimental to the strategy?

The strategy experiences hardship, as can be understood from the Greeks above (negative Gamma), in situations when the price of the underlying increases/decreases materially before the front month expiry.

Model portfolio size

The maximum risk per position varies over time and can be found in the position reports here. If you run a larger/smaller risk budget you merely trade proportionally larger/smaller positions.