Tim Olson
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33 lines
1.4 KiB
Markdown
33 lines
1.4 KiB
Markdown
---
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description: "A hedging strategy combining short stock with a long call at strike K >= S0, limiting upside loss on a short position while preserving downside profit."
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tags: [options, hedging, protective, bearish]
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---
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# Protective Call
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**Section**: 2.5 | **Asset Class**: Options | **Type**: Hedging
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## Overview
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The protective call (a.k.a. "married call" or "synthetic put") amounts to shorting stock and buying an ATM or OTM call option with strike K >= S0. The trader's outlook is bearish. The call option hedges the risk of the stock price rising, acting as insurance on the short stock position.
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## Construction
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- Short 1 share of stock at price S0
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- Buy 1 call option at strike K (K >= S0), paying net debit D
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Net position: short stock + long call
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## Payoff Profile
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f_T = S0 - S_T + (S_T - K)+ - D = S0 - K + (K - S_T)+ - D
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- Breakeven: S* = S0 - D
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- Max profit: P_max = S0 - D (if stock goes to zero)
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- Max loss: L_max = K - S0 + D (capped by the long call at strike K)
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## Key Conditions / Signals
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- Bearish on the underlying but seeking upside protection on the short
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- Elevated uncertainty or event risk where a sharp rise in the stock is possible
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- Useful when the trader wants to retain short stock exposure but limit loss from a rally
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## Notes
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The protective call is symmetrical to the protective put strategy. Academic literature on protective calls appears scarce. The debit paid for the call reduces the effective profit from stock depreciation.
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