Protective & Covered Strategy report

There are two different reasons why the Lotus Company used this Protective put strategy;

·         When attaining the shares stock limit the risk

·         For the protection of preceding purchased stock

By buying the stock, a protective put position is created as well as for share basis on a share buys a put option (Kester)

a.      Compare profits/losses for the Protective & Covered Strategy

In the protective put strategy, the profit is unlimited because of the prices of stock rise indefinitely. Moreover, by the cost of put and commissions, the profit is reduced. By using this strategy, there is no maximum limit to achieve profit. The synthetic long call is also known as Protective put.  For calculating the profit, the formula of this strategy is given below:

Max profit= unlimited

When the price of underlying profit achieved > Premium Paid + underlying purchase price

Profit = underlying price – underlying purchase price + Premium Paid

Figure 1: Profit or Loss of Protective Put

For this strategy the maximum loss is limited as well as for buying the put option is equal to the paid premium. For calculating the maximum loss, the formula is given as follow

:

b.      When should you use the “protective put” strategy?

It is the great long-term investment when you own a stock, and it is a good time to use the protective put strategy, but in the market there is a sudden downturn. To limit your loss, you would buy the protective put in the event in that case this thing gets really bad. To “lock in” your profits for this you can also buy a protective put. On a stock, if you have made a lot of money, as well as to grow it has a room if you think that you should buy a protective put as a result if the price drops you still in profit.

“Covered call”

In assets as well as sells call option where an investor holds the long position on the same asset to produce a stream of income than the covered cell strategy is used (Kester)

a.      Compare profits/losses for Protective & Covered Strategy

For writing the call in addition to the premium received, if the underlying stock price raises the strategy profit of OTM covered call include the gain of paper, call option sold up to the strike price. In this strategy the profit is limited. The formula of covered strategy profit is as follow:

The purchase price of the underlying stock is less than the received premium that is equal to the maximum loss. In this strategy the loss in unlimited when the underlying security drop.

b.      When should you use the “covered call” strategy?

In any market condition, the covered call option could be used. To achieve income in the stock covered calls can also be used above and beyond any dividends. Let us consider that stock doesn’t move above the price of strike your stock position can maintain as well as also collect the premium.  When trading covered calls is in commission traders, need to factor.