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.
Collar Strategy is an extension to Covered Call Strategy. A trader, who is bullish in nature but has a very low risk appetite and wants to mitigate his risk will implement the Collar Strategy. Collar involves buying of stock in either Cash/Futures Market, buying an ATM Put Option & selling an OTM Call Option. The expiry dates of the op ..
Price of Underlying - Purchase Price of Underlying - Premium Paid
Strike Price of Short Call - Purchase Price of Underlying + Net Premium Received
Maximum Loss Scenario
Premium Paid + Purchase Price of Underlying - Put Strike + Commissions Paid
Purchase Price of Underlying - Strike Price of Long Put - Net Premium Received
Risk
Limited
Limited
Reward
Unlimited
Limited
PROTECTIVE PUT Vs THE COLLAR - Strategy Pros & Cons
PROTECTIVE PUT
THE COLLAR
Similar Strategies
Long Call, Call Backspread
Call Spread, Bull Put 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 profit. • A trader can book more profit without this strategy if the prices goes high.
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 protects the losses on underlying asset. • Risk gets limited if the price of the stocks goes down. • Trader can get ownership benefits life dividend and voting rights.
