This strategy is simply the reversal of the Synthetic Call Strategy. This strategy is implemented when a trader is bearish on the market and expects to go down. Trader will short underlying stock in the cash market and buy either an ATM Call Option or OTM Call Option. The Call Option is bought to protect / hedge the upside risk on the short position. The ..
SHORT PUT Vs PROTECTIVE CALL - When & How to use ?
SHORT PUT
PROTECTIVE CALL
Market View
Bullish
Bearish
When to use?
This strategy works well when you're Bullish that the price of the underlying will not fall beyond a certain level.
This strategy is implemented when a trader is bearish on the market and expects to go down.
Action
Sell Put Option
Buy 1 ATM Call
Breakeven Point
Strike Price - Premium
Sale Price of Underlying + Premium Paid
SHORT PUT Vs PROTECTIVE CALL - Risk & Reward
SHORT PUT
PROTECTIVE CALL
Maximum Profit Scenario
Premium received in your account when you sell the Put Option.
Sale Price of Underlying - Price of Underlying - Premium Paid
Maximum Loss Scenario
Unlimited (When the price of the underlying falls.)
Premium Paid + Call Strike Price - Sale Price of Underlying + Commissions Paid
Risk
Unlimited
Limited
Reward
Limited
Unlimited
SHORT PUT Vs PROTECTIVE CALL - Strategy Pros & Cons
SHORT PUT
PROTECTIVE CALL
Similar Strategies
Bull Put Spread, Short Starddle
Put Backspread, Long Put
Disadvantage
• Unlimited risk. • Huge losses if the price of the underlying stock falls steeply.
• Profitable when market moves as expected. • Not good for beginners.
Advantages
• Benefit from time decay. • Less capital required than buying the stock outright. • Profit when underlying stock price rise, move sideways or drop by a relatively small account.
• Limited risk if the market moves in opposite direction as expected. • Allows you to keep open a profitable position to make further profits. • Unlimited profit potential.
