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

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

Short Call (Naked Call) Vs Protective Call (Synthetic Long Put)

  Short Call (Naked Call) Protective Call (Synthetic Long Put)
Short Call (Naked Call) Logo Protective Call (Synthetic Long Put) Logo
About Strategy Short Call (or Naked Call) strategy involves the selling of the Call Options (or writing call option). In this strategy, a trader is Very Bearish in his market view and expects the price of the underlying asset to go down in near future. This strategy is highly risky with potential for unlimited losses and is generally preferred by experienced traders. The strategy involves taking a single position of selling a Call Option of any type i.e. ITM or OTM. These naked calls are also known as Out-Of-The-Money Naked Call and In-The-Money Naked Call based on the type you choose. This strategy has limited rewards (max profit is premium received) and unlimited loss potential. When the trader goes short on call, the trader sells a call option and e... Read More 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 Bearish Bearish
Strategy Level Advance Beginners
Options Type Call Call + Underlying
Number of Positions 1 2
Risk Profile Unlimited Limited
Reward Profile Limited Unlimited
Breakeven Point Strike Price of Short Call + Premium Received Underlying Price - Call Premium

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

  Short Call (Naked Call) Protective Call (Synthetic Long Put)
When to use?

It is an aggressive strategy and involves huge risks. It should be used only in case where trader is certain about the bearish market view on the underlying.

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 Bearish

When you are expecting the price of the underlying or its volatility to only moderately increase.

Bearish

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

Action
  • Sell Call Option

  • Sell Underlying Stock or Future
  • Buy ATM Call Option

Breakeven Point Strike Price of Short Call + Premium Received

Break even is achieved when the price of the underlying is equal to total of strike price and premium received.

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 (Short Call (Naked Call) Vs Protective Call (Synthetic Long Put))

  Short Call (Naked Call) Protective Call (Synthetic Long Put)
Risks Unlimited

There risk is unlimited and depend on how high the price of the underlying moves.

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

The profit is limited to the 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

When underline asset goes down and option not exercised.

  • Max Profit = Premium Received
  • Max Profit Achieved When Price of Underlying <= Strike Price of Short Call

Underlying goes down and Option not exercised

Maximum Loss Scenario

When underline asset goes up and option exercised.

  • Maximum Loss = Unlimited
  • Loss Occurs When Price of Underlying > Strike Price of Short Call + Premium Received
  • Loss = Price of Underlying - Strike Price of Short Call - Premium Received

Underlying goes down and Option exercised

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

  Short Call (Naked Call) Protective Call (Synthetic Long Put)
Advantages

This strategy allows you to profit from falling prices in the underlying asset.

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

Disadvantage

There's unlimited risk on the upside as you are selling Option without holding the underlying.

Rewards are limited to premium received only.

Premium paid for Call Option may eat into your profits.

Simillar Strategies Covered Put, Covered Calls, Bear Call Spread Long Put







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