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

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

Protective Call (Synthetic Long Put) Vs Covered Strangle

  Protective Call (Synthetic Long Put) Covered Strangle
Protective Call (Synthetic Long Put) Logo Covered Strangle Logo
About Strategy 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 The covered strangle option strategy is a bullish strategy. The strategy is created by owning or buying a stock and selling an OTM Call and OTM Put. It is called covered strangle because the upside risk of the strangle is covered or minimized. The strategy is perfect to use when you are prepared to sell the holding or bought shares at a higher price if the market moves up but would also is ready to buy more shares if the market moves downwards. The profit and in this strategy is unlimited while the risk is only on the downside.
Market View Bearish Bullish
Strategy Level Beginners Advance
Options Type Call + Underlying Call + Put + Underlying
Number of Positions 2 3
Risk Profile Limited Limited
Reward Profile Unlimited Limited
Breakeven Point Underlying Price - Call Premium two break-even points

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

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

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.

A covered strangle strategy can be used when you are bullish on the market but also want to cover any downside risk. You are prepared to sell the shares on profit but are also willing to buy more shares in case the prices fall.

Market View Bearish

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

Bullish

The Strategy is perfect to apply when you're bullish on the market and expecting less volatility in the market.

Action
  • Sell Underlying Stock or Future
  • Buy ATM Call Option

Buy 100 shares + Sell OTM Call +Sell OTM Put

The covered strangle options strategy can be executed by buying 100 shares of a stock while simultaneously selling an OTM Put and Call of the same the stock and similar expiration date.

Breakeven Point 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.

two break-even points

There are 2 break-even points in the covered strangle strategy. One is the Upper break even point which is the sum of strike price of the Call option and premium received while the other is the lower break-even point which is the difference strike price of short Put and premium received.

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

  Protective Call (Synthetic Long Put) Covered Strangle
Risks 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

Limited

The risk on this strategy is only on the downside when the price moves below the strike price of the Put option.

Rewards 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

Limited

The maximum profit on this strategy happens when the stock price is above the call price on expiry. The profit is the total of the gain from buying/selling stocks and net premium received on selling options.

Maximum Profit Scenario

Underlying goes down and Option not exercised

You will earn the maximum profit when the price of the stock is above the Call option strike price on expiry. You will be assigned on the Call option, would be able to sell holding shares on profit while retaining the premiums received while selling the options.

Maximum Loss Scenario

Underlying goes down and Option exercised

The maximum loss would be when the stock price falls drastically and turns worthless. The premiums received while selling the options will compensate for some of the loss.

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

  Protective Call (Synthetic Long Put) Covered Strangle
Advantages

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

  • As the strategy involves buying shares when prices fall, there is long-term gain even if their short-term loss.
  • There is no upside risk due to the long position in stocks.
  • Allows you to earn income in a moderately bullish market.
Disadvantage

Premium paid for Call Option may eat into your profits.

  • The substantial risk when the price moves downwards.
  • Risk of assignments.
Simillar Strategies Long Put Long Strangle, Short Strangle







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