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

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

Protective Call (Synthetic Long Put) Vs Short Strangle (Sell Strangle)

  Protective Call (Synthetic Long Put) Short Strangle (Sell Strangle)
Protective Call (Synthetic Long Put) Logo Short Strangle (Sell 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 Short Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of same underlying asset and expiry date. This strategy can be used when the trader expects that the underlying stock will experience a very little volatility in the near term. It is a limited profit and unlimited risk strategy. The maximum profit earn is the net premium received. The maximum loss is achieved when the underlying moves either significantly upwards or downwards at expiration. A net credit is taken to enter into this strategy. For this reason, the Short Strangles are Credit Spreads. The usual Short Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY S... Read More
Market View Bearish Neutral
Strategy Level Beginners Advance
Options Type Call + Underlying Call + Put
Number of Positions 2 2
Risk Profile Limited Unlimited
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 Short Strangle (Sell Strangle)?

  Protective Call (Synthetic Long Put) Short Strangle (Sell 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.

The Short Strangle is perfect in a neutral market scenario when the underlying is expected to be less volatile.

Market View Bearish

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

Neutral

When you are expecting little volatility and movement in the price of the underlying.

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

  • Sell OTM Call
  • Sell OTM Put

Sell 1 out-of-the-money put and sell 1 out-of-the-money call which belongs to same underlying asset and has the same expiry 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

A strangle has two break-even points.

Lower Break-even = Strike Price of Put - Net Premium

Upper Break-even = Strike Price of Call+ Net Premium"

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

  Protective Call (Synthetic Long Put) Short Strangle (Sell 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

Unlimited

The maximum loss is unlimited in this strategy. You will incur losses when the price of the underlying moves significantly either upwards or downwards at expiration.

Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received

Or

Loss = Strike Price of Short Put - Price of Underlying - Net Premium Received

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

For maximum profit, the price of the underlying on expiration date must trade between the strike prices of the options. The maximum profit is limited to the net premium received while selling the Options.

Maximum Profit = Net Premium Received

Maximum Profit Scenario

Underlying goes down and Option not exercised

Both Option not exercised

Maximum Loss Scenario

Underlying goes down and Option exercised

One Option exercised

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

  Protective Call (Synthetic Long Put) Short Strangle (Sell Strangle)
Advantages

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

The strategy offers higher chance of profitability in comparison to Short Straddle due to selling of OTM Options.

Disadvantage

Premium paid for Call Option may eat into your profits.

Limited reward with high risk exposure.

Simillar Strategies Long Put Short Straddle, Long Strangle







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