Explanation
Protective Call is a hybrid option strategy that involves trade in futures and options. This strategy is implemented by a trader to protect the short position in case of sudden upside movement seen in the underlying. The process is known as hedging the short position by going long on at–the–money or slightly out of–money (OTM) Call Option. The strategy is simply the reversal of the Synthetic Call option strategy. The long strikes are left at the discretion of the trader depending on his/her risk-taking capacity.
Risk:
Risk is limited to the total premium paid for buying option.
Reward:
The maximum reward is limited but significant till the underlying loses its value.
Construction
Sell Nifty 50 Future
Buy 1 ATM Call Option
Payoff Chart
| Option Type | Expiry Date | Strike Price | LTP | Action | No. Of Lots |
| FUTURES | 29/03/2023 | -NA- | 17194.9 | Sell | 1 |
| CALL | 29/03/2023 | 17150.0 | 160.95 | Buy | 1 |
| Market Expiry | Payoff 1 | Payoff 2 | Net Premium | Option Payoff at expiry |
| 16750.0 | 444.9 | 0.0 | -160.95 | 283.95 |
| 16800.0 | 394.9 | 0.0 | -160.95 | 233.95 |
| 16850.0 | 344.9 | 0.0 | -160.95 | 183.95 |
| 16900.0 | 294.9 | 0.0 | -160.95 | 133.95 |
| 16950.0 | 244.9 | 0.0 | -160.95 | 83.95 |
| 17000.0 | 194.9 | 0.0 | -160.95 | 33.95 |
| 17050.0 | 144.9 | 0.0 | -160.95 | -16.05 |
| 17100.0 | 94.9 | 0.0 | -160.95 | -66.05 |
| 17150.0 | 44.9 | 0.0 | -160.95 | -116.05 |
| 17200.0 | -5.1 | 50.0 | -160.95 | -116.05 |
| 17250.0 | -55.1 | 100.0 | -160.95 | -116.05 |
| 17300.0 | -105.1 | 150.0 | -160.95 | -116.05 |
| 17350.0 | -155.1 | 200.0 | -160.95 | -116.05 |
| 17400.0 | -205.1 | 250.0 | -160.95 | -116.05 |
| 17450.0 | -255.1 | 300.0 | -160.95 | -116.05 |
| 17500.0 | -305.1 | 350.0 | -160.95 | -116.05 |
| 17550.0 | -355.1 | 400.0 | -160.95 | -116.05 |
Option Trading Example
Suppose Nifty is trading at 17150 levels. The trader is bearish on the market and expects the underlying to fall in the near term but at the same time wants to hedge the short risk. He sold 1 lot of Nifty 17200in the futures market. Now in order to hedge the short positions, he will be buying options 1 lot of 17150 ATM Call Option at a premium of Rs.160.
Scenario 1:
If at expiry, Nifty falls as per the expectation of the trader to 17000, then the trader will make a profit of Rs. 2000. [(17200-17000)-160)*50]
Scenario 2:
If at expiry, Nifty rises beyond 17250 levels, then the trader will make a loss of
Loss = Loss on short index + Gain on long call option
5500 = [(-17250+17200) + (17250 - 17150-160) *50]
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