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

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

Protective Call (Synthetic Long Put) Vs Short Call Butterfly

  Protective Call (Synthetic Long Put) Short Call Butterfly
Protective Call (Synthetic Long Put) Logo Short Call Butterfly 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 Short Call Butterfly (or Short Butterfly) is a neutral strategy similar to Long Butterfly but bullish on the volatility. This strategy is a limited risk and limited profit strategy. This strategy consists of two long calls at a middle strike (or ATM) and one short call each at a lower and upper strike. All the options must have the same expiration date. Also, the upper and lower strikes (or wings) must both be equidistant from the middle strike (or body). In simple terms, it involves Sell 1 ITM Call, Buy 2 ATM Calls and Sell 1 OTM Call. The strike prices of all Options should be at equal distance from the current price as shown in the example below. The usual Short Butterfly strategy looks like as below for NIFTY current index value as 1... Read More
Market View Bearish Neutral
Strategy Level Beginners Advance
Options Type Call + Underlying Call
Number of Positions 2 4
Risk Profile Limited Limited
Reward Profile Unlimited Limited
Breakeven Point Underlying Price - Call Premium 2 Break-even Points

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

  Protective Call (Synthetic Long Put) Short Call Butterfly
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.

This strategy is meant for special scenarios where you foresee a lot of volatility in the market due to election results, budget, policy change, annual result announcements etc.

Market View Bearish

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

Neutral

When you are unsure about the direction in the movement in the price of the underlying but are expecting high volatility in it in the near future.

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

  • Buy 2 ATM Call
  • Sell 1 ITM Call
  • Sell 1 OTM Call

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.

2 Break-even Points

There are 2 break even points in this strategy.

  1. Lower Break-even = Lower Strike Price + Net Premium
  2. Upper Break-even = Higher Strike Price - Net Premium

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

  Protective Call (Synthetic Long Put) Short Call Butterfly
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 maximum risk is limited.

Maximum Risk = Higher strike price- Lower Strike Price - Net Premium

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 profit is limited to the net premium received. This happens when the price of the underlying is trading beyond the range of strike prices at expiration date.

Maximum Profit Scenario

Underlying goes down and Option not exercised

All Options exercised or not exercised

Maximum Loss Scenario

Underlying goes down and Option exercised

Only ITM Call exercised

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

  Protective Call (Synthetic Long Put) Short Call Butterfly
Advantages

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

This strategy requires no investment as net premium is positive and received. It allows you to benefit from high volatile market scenarios without the need to speculate on the direction of price movement.

Disadvantage

Premium paid for Call Option may eat into your profits.

Profitability depends on significant movement in the price of the underlying.

Simillar Strategies Long Put Long Straddle, Long Call Butterfly
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