One of the option strategy protective call

1. STRATEGY:PROTECTIVE CALL /
SYNTHETIC LONG PUT
R.NAGA SRINIVASARAO
NAGA 1

2. STRATEGY: PROTECTIVE CALL / SYNTHETIC LONG PUT
This is a strategy wherein an investor has gone short on a stock future and buys a call to hedge. An investor shorts a
stock future and buys an ATM or slightly OTM Call. In case the stock future price falls the investor gains in the downward
fall in the price. However, incase there is an unexpected rise in the price of the stock the loss is limited. The pay-off from
the Long Call will increase thereby compensating for the loss in value of the short stock future position.
When to Use: If the investor is of the view
that the markets will go down (bearish) but
wants to protect against any unexpected
rise in the price of the stock.
Risk: Limited. Maximum Risk is Call Strike
Price – Stock Price + Premium
Reward: Maximum is Stock Price – Call
Premium
Breakeven: Stock Price – Call Premium
Example :
Suppose Apple stock. is trading at 184$ in June. An investor Mr.
A buys a $185 call for 2$ while shorting the stock at $184.
Strategy : Short Stock Future+ Buy Call Option
Sells Stock future Current Market Price
($)
184
Buys Call Strike Price ($) 185
Mr. A pays Premium ($) 2
Break Even Point ($) (Stock Price – Call Premium) 182
NAGA 2

3. Apple. closes
at ($)(Expiry)
Payoff from
the stock ($.)
Net Payoff
from the Call
Option ($)
Net Payoff ($)
165 19 -2 17
175 9 -2 7
180 4 -2 2
181 3 -2 1
182 2 -2 0
183 1 -2 -1
184 0 -2 -2
185 -1 -2 -3
186 -2 -1 -3
187 -3 0 -3
188 -4 1 -3
189 -5 2 -3
190 -11 8 -3
The payoff schedule
The payoff chart (Synthetic Long Put)
If you need more clarification kindly contact me.
Mail id: naga@marketinvestment.com,
rao9948281822@gmail.com.
NAGA 3