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Covered Call Vs Protective Call (Synthetic Long Put) Options Trading Strategy Comparison

Compare Covered Call and Protective Call (Synthetic Long Put) options trading strategies. Find similarities and differences between Covered Call and Protective Call (Synthetic Long Put) strategies. Find the best options trading strategy for your trading needs.

Covered Call Vs Protective Call (Synthetic Long Put)

  Covered Call Protective Call (Synthetic Long Put)
Covered Call Logo Protective Call (Synthetic Long Put) Logo
About Strategy A Covered Call is a basic option trading strategy frequently used by traders to protect their huge share holdings. It is a strategy in which you own shares of a company and Sell OTM Call Option of the company in similar proportion. The Call Option would not get exercised unless the stock price increases. Till then you will earn the Premium. This a unlimited risk and limited reward strategy. Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income. The Protective Call strategy is a hedging strategy. In this strategy, a trader shorts position in the underlying asset (sell shares or sell futures) and buys an ATM Call Option to cover against the rise in the price of the underlying. This strategy is opposite of the Synthetic Call strategy. It is used when the trader is bearish on the underlying asset and would like to protect 'rise in the price' of the underlying asset. The risk is limited in the strategy while the rewards are unlimited. How to use a Protective Call trading strategy? The usual Protective Call Strategy looks like as below for State Bank of India (SBI) Shares which are currently traded at Rs 275 (SBI Spot Price): Protective Call Orders - SBI Stock Orde... Read More
Market View Bullish Bearish
Strategy Level Advance Beginners
Options Type Call + Underlying Call + Underlying
Number of Positions 2 2
Risk Profile Unlimited Limited
Reward Profile Limited Unlimited
Breakeven Point Purchase Price of Underlying- Premium Recieved Underlying Price - Call Premium

When and how to use Covered Call and Protective Call (Synthetic Long Put)?

  Covered Call Protective Call (Synthetic Long Put)
When to use?

The covered call option strategy works well when you have a mildly Bullish market view and you expect the price of your holdings to moderately rise in future.

The Protective Call option strategy is used when you are bearish in market view and want to short shares to benefit from it. The strategy minimizes your risk in the event of prime movements going against your expectations.

Market View Bullish

When you are expecting a moderate rise in the price of the underlying or less volatility.

Bearish

When you are bearish on the underlying but want to protect the upside.

Action
  • Buy Underlying
  • Sell OTM Call Option

Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income.

  • Sell Underlying Stock or Future
  • Buy ATM Call Option

Breakeven Point Purchase Price of Underlying- Premium Recieved
Underlying Price - Call Premium

When the price of the underlying is equal to the total of the sale price of the underlying and premium paid.

Compare Risks and Rewards (Covered Call Vs Protective Call (Synthetic Long Put))

  Covered Call Protective Call (Synthetic Long Put)
Risks Unlimited

Maximum loss is unlimited and depends on by how much the price of the underlying falls. Loss happens when price of underlying goes below the purchase price of underlying.

Loss = (Purchase Price of Underlying - Price of Underlying) + Premium Received

Limited

The maximum loss is limited to the premium paid for buying the Call option. It occurs when the price of the underlying is less than the strike price of Call Option.

Maximum Loss = Call Strike Price - Sale Price of Underlying + Premium Paid

Rewards Limited

You earn premium for selling a call. Maximum profit happens when purchase price of underlying moves above the strike price of Call Option.

Max Profit= [Call Strike Price - Stock Price Paid] + Premium Received

Unlimited

The maximum profit is unlimited in this strategy. The profit is dependent on the sale price of the underlying.

Profit = Sale Price of Underlying - Price of Underlying - Premium Paid

Maximum Profit Scenario

Underlying rises to the level of the higher strike or above.

Underlying goes down and Option not exercised

Maximum Loss Scenario

Underlying below the premium received

Underlying goes down and Option exercised

Pros & Cons or Covered Call and Protective Call (Synthetic Long Put)

  Covered Call Protective Call (Synthetic Long Put)
Advantages

It helps you generate income from your holdings. Also allows you to benefit from 3 movements of your stocks: rise, sidewise and marginal fall.

Minimizes the risk when entering into a short position while keeping the profit potential limited.

Disadvantage

Unlimited risk for limited reward.

Premium paid for Call Option may eat into your profits.

Simillar Strategies Bull Call Spread Long Put







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