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.
Bull Call Spread option trading strategy is used by a trader who is bullish in nature and expects the underlying asset to give decent returns in the near future. This strategy includes buying of an ‘In The Money’ Call Option and selling of ‘Deep Out Of the Money’ Call Option of the same underlying asset and the same expiration date. ..
PROTECTIVE PUT Vs BULL CALL SPREAD - When & How to use ?
PROTECTIVE PUT
BULL CALL SPREAD
Market View
Bullish
Bullish
When to use?
This strategy is adopted when a trader is long on the underlying asset but skeptical of the downside.
This strategy is used when an investor is Bullish in the market but expect the underlying to gain mildly in near future.
Action
Buy 1 ATM Put
Buy ITM Call Option, Sell OTM Call Option
Breakeven Point
Purchase Price of Underlying + Premium Paid
Strike price of purchased call + net premium paid
PROTECTIVE PUT Vs BULL CALL SPREAD - Risk & Reward
PROTECTIVE PUT
BULL CALL SPREAD
Maximum Profit Scenario
Price of Underlying - Purchase Price of Underlying - Premium Paid
(Strike Price of Call 1 - Strike Price of Call 2) - Net Premium Paid
Maximum Loss Scenario
Premium Paid + Purchase Price of Underlying - Put Strike + Commissions Paid
Net Premium Paid
Risk
Limited
Limited
Reward
Unlimited
Limited
PROTECTIVE PUT Vs BULL CALL SPREAD - Strategy Pros & Cons
PROTECTIVE PUT
BULL CALL SPREAD
Similar Strategies
Long Call, Call Backspread
Collar
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 potential to the higher strike call sold if the underlying stock price rises. • Maximum profit only if stock rises to the higher of 2 strike prices selected.
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.
• Allows you to reduce risk and cost of your investment. • When placing the spread, exit strategy is pre-determined in advance. • Risk is limited to the net premium paid.
