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.
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 ..
PROTECTIVE PUT Vs PROTECTIVE CALL - When & How to use ?
PROTECTIVE PUT
PROTECTIVE CALL
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 implemented when a trader is bearish on the market and expects to go down.
Action
Buy 1 ATM Put
Buy 1 ATM Call
Breakeven Point
Purchase Price of Underlying + Premium Paid
Sale Price of Underlying + Premium Paid
PROTECTIVE PUT Vs PROTECTIVE CALL - Risk & Reward
PROTECTIVE PUT
PROTECTIVE CALL
Maximum Profit Scenario
Price of Underlying - Purchase Price of Underlying - Premium Paid
Sale Price of Underlying - Price of Underlying - Premium Paid
Maximum Loss Scenario
Premium Paid + Purchase Price of Underlying - Put Strike + Commissions Paid
Premium Paid + Call Strike Price - Sale Price of Underlying + Commissions Paid
Risk
Limited
Limited
Reward
Unlimited
Unlimited
PROTECTIVE PUT Vs PROTECTIVE CALL - Strategy Pros & Cons
PROTECTIVE PUT
PROTECTIVE CALL
Similar Strategies
Long Call, Call Backspread
Put Backspread, Long Put
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.
• Profitable when market moves as expected. • Not good for beginners.
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.
• 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.
