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  • Protective Call & Covered Put.

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    Vishesh Sinha
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    An investor uses a protective call strategy when they are bearish on the markets but want protection from an unexpected rise in the price of a shorted stock. They will short the stock and buy a slightly out of the money call option to limit their losses if the stock rises. A covered put strategy is used when an investor has a moderately bearish view of the markets. They will short a put option while holding a long position in the underlying stock. This limits their losses if the stock remains flat or rises above the strike price by the amount of premium received for selling the put. Example payoff schedules are provided to illustrate how the maximum loss is limited for each strategy compared to shorting the stock alone, and

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    An investor uses a protective call strategy when they are bearish on the markets but want protection from an unexpected rise in the price of a shorted stock. They will short the stock and buy a slightly out of the money call option to limit their losses if the stock rises. A covered put strategy is used when an investor has a moderately bearish view of the markets. They will short a put option while holding a long position in the underlying stock. This limits their losses if the stock remains flat or rises above the strike price by the amount of premium received for selling the put. Example payoff schedules are provided to illustrate how the maximum loss is limited for each strategy compared to shorting the stock alone, and

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    12 views10 pages

    Protective Call & Covered Put.

    Uploaded by

    Vishesh Sinha
    An investor uses a protective call strategy when they are bearish on the markets but want protection from an unexpected rise in the price of a shorted stock. They will short the stock and buy a slightly out of the money call option to limit their losses if the stock rises. A covered put strategy is used when an investor has a moderately bearish view of the markets. They will short a put option while holding a long position in the underlying stock. This limits their losses if the stock remains flat or rises above the strike price by the amount of premium received for selling the put. Example payoff schedules are provided to illustrate how the maximum loss is limited for each strategy compared to shorting the stock alone, and

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 10

    Protective Call & Covered

    Put
    29 Premchand Kumawat
    45 Simerpreet Ghumman
    51 Tanvi Kambli
    57 Vishesh Sinha
    59 Disha Bhandari
    Definition
    • Protective Call
    • This is a strategy wherein an investor has gone short on a stock and
    buys a call to hedge. This is an opposite of Synthetic Call. An investor
    shorts a stock and buys an ATM or slightly OTM Call.

    • When to Use: If the investor is of the view that the markets will go down
    (bearish) but wants to protect against any unexpected rise in the price of the
    stock.
    Covered Put

    • This strategy is opposite to a Covered Call. A Covered Call is a neutral


    to bullish strategy, whereas a Covered Put is a neutral to Bearish
    strategy.

    • When to Use: If the investor is of the view that the markets are
    moderately bearish.
    Example of Protective Call
    Example : Suppose XYZ ltd. is trading at Rs. 3457 in January. An investor Ms.
    Janvi buys a Rs 3500 call for Rs. 100 while shorting the stock at Rs. 3457.
    The net credit to the investor is Rs. 3357 (Rs. 3457 – Rs. 100).

    Strategy : Short Stock + Buy Call Option


    Sells Stock (MS. Janvi Receives) Current Market Price (Rs.) 3457

    Buys Call Strike Price (Rs.) 3500

    Ms. Janvi Pays Premium (Rs.) 100

    Break Even Point (Rs.) (Stock Price – 3357


    Call Premium)
    The Payoff Schedule
    XYZ Ltd. Close at (Rs.) Payoff from the Stock Net Payoff from the Call Net Payoff (Rs.)
    (Rs.) Option (Rs.)
    3100 357 -100 257
    3150 307 -100 207
    3200 257 -100 157
    3300 157 -100 57
    3350 107 -100 7
    3357 100 -100 0
    3400 57 -100 -43
    3457 0 -100 -100
    3600 -143 0 -143
    3700 -243 100 -143
    3800 -343 200 -143
    3900 -443 300 -143
    4000 -543 400 -143
    Chart
    Spot Price P/L Protective Call
    300
    3100 257
    250
    3150 207
    3200 157 200

    3300 57 150
    3350 7
    100
    3357 0
    50
    3400 -43
    3457 -100 0
    3000 3200 3400 3600 3800 4000 4200
    3600 -143 -50
    3700 -143
    -100
    3800 -143
    -150
    3900 -143
    4000 -143 -200
    Example of Covered Put
    • Suppose XYZ Ltd. is trading at Rs 3500 in January. An investor, Ms.
    Janvi, shorts Rs 3300 Put by selling a February Put for Rs. 24 while
    shorting an Mahindra Ltd. stock. The net credit received by Ms. Janvi
    is Rs. 3500 + Rs. 24 = Rs. 3524.

    • Strategy= Short Stock + Short Put Option


    Sells Stock (Ms. Janvi Receives) Current Market Price (Rs.) 3500
    Sells Put Strike Price (Rs.) 3300
    Ms. Janvi receives Premium (Rs.) 24
    Break Even Point (Rs.) (Sale Price of 3524
    Stock + Put Premium)
    The Payoff Schedule
    XYZ Ltd. Close at (Rs.) Payoff from the Stock (Rs.) Net Payoff from the Put Net Payoff (Rs.)
    Option (Rs.)

    3000 500 -276 224


    3100 400 -176 224
    3200 300 -76 224
    3300 200 24 224
    3400 100 24 124
    3450 50 24 74
    3500 0 24 24
    3524 -24 24 0
    3550 -50 24 -26
    3600 -100 24 -76
    3635 -135 24 -111
    3650 -160 24 -136
    Chart
    Spot Price P/L Covered Put
    3000 224
    250

    3100 224
    200

    3200 224
    150
    3300 224
    100
    3400 124

    50
    3450 74

    0
    3500 24 2900 3000 3100 3200 3300 3400 3500 3600 3700

    3524 0 -50

    3550 -26 -100

    3600 -76
    -150

    3635 -111
    -200

    3650 -136
    Thank You

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