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Protective Call

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Purpose of Protective Call

1. To protect a short stocks position from decline in value


Expectations of Protective Call

Bullish


Type of Spread

Credit Spread


How To Use Protective Call

Buy to open 1 contract of at the money Call Options for every 100 shares that you shorted.

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Profit Potential of Protective Call :
Protective Call is an option trading hedging strategy which, combined with the underlying short stock, grants unlimited maximum profit as long as the underlying stock continues to drop while limited losses should the stock should suddenly surge.

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Profit Calculation of Protective Call :

Profit = (initial stock price - current stock price - cost of call) x number of shares


Risk / Reward of Protective Call:

Upside Maximum Profit: Unlimited
(to maximum of stock price)

Maximum Loss: Limited


Break Even Point of Protective Call:

Breakeven = Initial stock price - cost of call options bought.


Advantages Of Protective Call:

  • Allows you to hold on to your short stock position while insuring against any losses.

  • Allows you to quickly transform the position into a Synthetic Straddle options trading position in order to profit from both up and down moves.


    Disadvantages Of Protective Call:

  • Cost of the call options eats into profit margin.


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