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.
Bear Call Spread option trading strategy is used by a trader who is bearish in nature and expects the underlying asset to dip in the near future. This strategy includes buying of an ‘Out of the Money’ Call Option and selling one ‘In the Money’ Call Option of the same underlying asset and the same expiration date. When you write a call, you receive premium thereby r ..
PROTECTIVE PUT Vs BEAR CALL SPREAD - When & How to use ?
PROTECTIVE PUT
BEAR CALL SPREAD
Market View
Bullish
Bearish
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 you are bearish in market view. The strategy minimizes your risk in the event of prime movements going against your expectations.
Action
Buy 1 ATM Put
Buy OTM Call Option, Sell ITM Call Option
Breakeven Point
Purchase Price of Underlying + Premium Paid
Strike Price of Short Call + Net Premium Received
PROTECTIVE PUT Vs BEAR CALL SPREAD - Risk & Reward
PROTECTIVE PUT
BEAR CALL SPREAD
Maximum Profit Scenario
Price of Underlying - Purchase Price of Underlying - Premium Paid
Max Profit = Net Premium Received - Commissions Paid
Maximum Loss Scenario
Premium Paid + Purchase Price of Underlying - Put Strike + Commissions Paid
Maximum Loss = Long Call Strike Price - Short Call Strike Price - Net Premium Received
Risk
Limited
Limited
Reward
Unlimited
Limited
PROTECTIVE PUT Vs BEAR CALL SPREAD - Strategy Pros & Cons
PROTECTIVE PUT
BEAR CALL SPREAD
Similar Strategies
Long Call, Call Backspread
Bear Put Spread, Bull Call Spread
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.
• Limited amount of profit. • Margin requirement, more commission charges.
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.
• This strategy takes advantage of time decay. • Investors can get profit in a flat market scenario. • Investors can earn options premium income with a lower degree of risk.
