This strategy is exactly opposite to Covered Call Strategy. Here the investor is neutral or moderately bearish in nature and wants to take advantage of the price fall in the near future. The trader will short one lot of stock future. Now the trader will short ATM Put Option, the option strike price will be his exit price. If the prices rally above the strike price, the
This strategy is adopted by traders who are bullish in nature. He expects market and volatility to rise in the near future. A trader need not be direction specific here (i.e. an upward or downward trend, but a small bias towards an uptrend should always be present, as the gains will be much higher once the market moves up r ..
Lower breakeven = strike price of the short call, Upper breakeven = strike price of long calls + point of maximum loss
COVERED PUT Vs CALL BACKSPREAD - When & How to use ?
COVERED PUT
CALL BACKSPREAD
Market View
Bearish
Bullish
When to use?
The Covered Put works well when the market is moderately Bearish.
This strategy is used when the investor expects the price of the stock to rise in the future.
Action
Sell Underlying Sell OTM Put Option
Sell 1 ITM Call, BUY 2 OTM Call
Breakeven Point
Futures Price + Premium Received
Lower breakeven = strike price of the short call, Upper breakeven = strike price of long calls + point of maximum loss
COVERED PUT Vs CALL BACKSPREAD - Risk & Reward
COVERED PUT
CALL BACKSPREAD
Maximum Profit Scenario
The profit happens when the price of the underlying moves above strike price of Short Put.
Unlimited profit potential if the stock goes in upward direction.
Maximum Loss Scenario
Price of Underlying - Sale Price of Underlying - Premium Received
Strike Price of long call - Strike Price of short call - Net premium received
Risk
Unlimited
Limited
Reward
Limited
Unlimited
COVERED PUT Vs CALL BACKSPREAD - Strategy Pros & Cons
COVERED PUT
CALL BACKSPREAD
Similar Strategies
Bear Put Spread, Bear Call Spread
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Disadvantage
• Limited profit, unlimited risk. • Trader should have enough experience before using this strategy.
Advantages
• Investors can book profit when underlying stock price drop, move sideways or rises by a small amount. • Able to generate monthly income. • Able to generate profit from fall in prices or mild increase in the prices.