What is the max loss of a Protective Call?

The max loss is Cost of the Call.

When do I breakeven when utilizing a Protective Call strategy?

The breakeven is defined as Varies.

What is the typical application of a Protective Call?

The typical applicatio is: 1. Protect short shares from a rapid, volatile price increase.

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Option Strategies Details

Setup

Short 100 Shares, Buy 1 ATM or OTM Call

Typical Application

1. Protect short shares from a rapid, volatile price increase

Volatility forecast

Price forecast

Breakeven

Varies

PnL Equivalent

Long Put

Max contract loss

Cost of the Call

Max position loss

Distance between the cost basis of shares and the strike price minus the cost of the Call. (You are short 100 shares of stock XYZ sold at $100 per share and you buy a $110C for $3. Stock XYZ goes to $150. Your loss is $5,000 (current share price minus sold price) - $4,000 (the value of the $110C when the stock goes to $150) - $300 (the cost of the $110C) = -$1,300.)

Protective Call

Level: Beginner

1 Leg

Debit

Beginner

You sell (or are already short) 100 shares and buy 1 ATM or OTM Call

Description

A trader who is short 100 shares of stock may buy a Call. The trader pays a debit, called a premium, to buy the Call and has the right (but not the obligation) to buy 100 shares at the strike price. The trader is "protecting" those 100 short shares from a large, volatile price increase with the Call.

Suppose you short 100 shares of XYZ stock at $50 per share and, over the course of 3 months, the price of XYZ decreases to $45. Great trade! However, you forecast a potentially-large, fast price increase and increase in volatility, so you buy a $47 strike Call for $1.

You now have the right to buy 100 shares of XYZ at $47 per share, guaranteeing you a minimum profit of $2 per share on the whole position: $50 (cost basis) - $47 (strike price) - $1 (the premium paid for the Put) = $2 x 100 shares = $200.