If the trader is bearish on market and bullish in volatility, he will implement this strategy. However the trader can be neutral in nature i.e. indifferent if the market moves in either of the direction, this strategy will make profits, but uptrend will give a capped income than downtrend which will give unlimited returns.
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 ..
PUT BACKSPREAD Vs PROTECTIVE CALL - When & How to use ?
PUT BACKSPREAD
PROTECTIVE CALL
Market View
Bearish
Bearish
When to use?
This strategy is implemented when a trader is bearish on the market and expects to go down.
Action
Buy 1 ATM Call
Breakeven Point
Sale Price of Underlying + Premium Paid
PUT BACKSPREAD Vs PROTECTIVE CALL - Risk & Reward
PUT BACKSPREAD
PROTECTIVE CALL
Maximum Profit Scenario
Sale Price of Underlying - Price of Underlying - Premium Paid
Maximum Loss Scenario
Premium Paid + Call Strike Price - Sale Price of Underlying + Commissions Paid
Risk
Limited
Limited
Reward
Unlimited
Unlimited
PUT BACKSPREAD Vs PROTECTIVE CALL - Strategy Pros & Cons
PUT BACKSPREAD
PROTECTIVE CALL
Similar Strategies
Put Backspread, Long Put
Disadvantage
• Profitable when market moves as expected. • Not good for beginners.
Advantages
• 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.
