Protective Put Strategy is a hedging strategy where trader guards himself from the downside risk. This strategy is adopted when a trader is long on the underlying asset but skeptical of the downside. He will buy one ATM Put Option to hedge his position. Now, if the underlying asset moves either up or down, the trader is in a safe position.
Long Combo Option Trading Strategy is implemented when a trader is bullish in nature and expects the stock price to rise in the near future. Here a trader will sell one ‘Out of the Money’ Put Option and buy one ‘Out of the Money’ Call Option. This trade will require less capital to implement since the amount required to buy the call will be covered by the amount received ..
PROTECTIVE PUT Vs LONG COMBO - When & How to use ?
PROTECTIVE PUT
LONG COMBO
Market View
Bullish
Bullish
When to use?
This strategy is adopted when a trader is long on the underlying asset but skeptical of the downside.
This strategy is used when an investor Bullish on an underlying but don't have the required capital or the risk appetite to invest directly into it.
Action
Buy 1 ATM Put
Sell OTM Put Option, Buy OTM Call Option
Breakeven Point
Purchase Price of Underlying + Premium Paid
Call Strike + Net Premium
PROTECTIVE PUT Vs LONG COMBO - Risk & Reward
PROTECTIVE PUT
LONG COMBO
Maximum Profit Scenario
Price of Underlying - Purchase Price of Underlying - Premium Paid
Underlying asset goes up and Call option exercised
Maximum Loss Scenario
Premium Paid + Purchase Price of Underlying - Put Strike + Commissions Paid
Underlying asset goes down and Put option exercised
Risk
Limited
Unlimited
Reward
Unlimited
Unlimited
PROTECTIVE PUT Vs LONG COMBO - Strategy Pros & Cons
PROTECTIVE PUT
LONG COMBO
Similar Strategies
Long Call, Call Backspread
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Disadvantage
• Value of protective put position decreases as time passes • Holding period of the protective put can be affected by the timing as a result tax rate on the profit or loss from the stock can be affected.
• Losses can keep on increasing as the price of stock goes down. • High risk strategy.
Advantages
• Unlimited potential profit due to indefinitely rise in the underlying stock price . • This strategy allows you to hold on to your stocks while insuring against losses. • Hedging strategy, trader can guard himself from the downside risk.
• Capital investment is low and returns are high. • Unlimited reward, returns keep on increasing with the increase on stock price. • Leverage facility provided by this strategy is very beneficial.
