A trader shorts or writes a Call Option when he feels that underlying stock price is likely to go down. Selling Call Option is a strategy preferred for experienced traders.
However this strategy is very risky in nature. If the stock rallies on the upside, your risk becomes potentially unquantifiable and unlimited. If the strategy
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 CALL Vs PROTECTIVE CALL - When & How to use ?
SHORT CALL
PROTECTIVE CALL
Market View
Bearish
Bearish
When to use?
It is an aggressive strategy and involves huge risks. It should be used only in case where trader is certain about the bearish market view on the underlying.
This strategy is implemented when a trader is bearish on the market and expects to go down.
Action
Sell or Write Call Option
Buy 1 ATM Call
Breakeven Point
Strike Price of Short Call + Premium Received
Sale Price of Underlying + Premium Paid
SHORT CALL Vs PROTECTIVE CALL - Risk & Reward
SHORT CALL
PROTECTIVE CALL
Maximum Profit Scenario
Max Profit = Premium Received
Sale Price of Underlying - Price of Underlying - Premium Paid
Maximum Loss Scenario
Loss Occurs When Price of Underlying > Strike Price of Short Call + Premium Received
Premium Paid + Call Strike Price - Sale Price of Underlying + Commissions Paid
Risk
Unlimited
Limited
Reward
Limited
Unlimited
SHORT CALL Vs PROTECTIVE CALL - Strategy Pros & Cons
SHORT CALL
PROTECTIVE CALL
Similar Strategies
Covered Put, Covered Calls
Put Backspread, Long Put
Disadvantage
• Unlimited risk to the upside underlying stocks. • Potential loss more than the premium collected.
• Profitable when market moves as expected. • Not good for beginners.
Advantages
• With the help of this strategy, traders can book profit from falling prices in the underlying asset. • Less investment, more profit. • Traders can book profit when underlying stock price fall, move sideways or rise by a small amount.
• 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.
