The Protective Call is a hedging strategy whereby the trader, who has an existing short position in the underlying security, buys call options to guard against a rise in the price of that security.
Sell short 100 shares; Buy 1 call.
A Protective Call strategy is usually employed when the trader is still bearish on the underlying but wary of uncertainties in the near term. The call option is thus purchased to protect unrealized gains on the existing short position in the underlying.
Profit potential
The Protective Call is also known as a Synthetic Long Put as its risk/reward profile is the same that of a long put's. Like the Long Put strategy, there is no limit to the maximum profit attainable using this strategy.
Stock sale price minus the call premium paid, if the stock falls to zero.
Limited Risk
Maximum loss for this strategy is limited and is equal to the premium paid for buying the call option.
Call strike price minus the stock sale price, plus the call premium paid.
Breakeven Point(s)
Stock sale price minus the call premium paid, provided that price is between zero and the call strike.
Example
An options trader is short 100 shares of XYZ stock trading at $50 in June. He implements a Protective Call strategy by purchasing a SEP 50 call option trading at $200 to insure his short position against a devastating move to the upside.
Max Loss Capped at $200
Maximum loss occurs when the stock price is $50 or higher at expiration. Even if the stock rallies to $70 on expiration, his max loss is capped at $200. Let's see how this works out.
At $70, his short stock position will suffer a loss of $2000. However, his SEP 50 call will have an intrinsic value of $2000 and can be sold for that amount. Including the initial $200 paid to buy the call option, his net loss will be $2000 - $2000 + $200 = $200.
Profit potential
There is no limit to the profits attainable should the stock price head south. Suppose the stock price crashes to $30, his short position will gain $2000. Excluding the $200 paid for the Protective Call, his net profit is $1800.
These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.
Commissions
For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.
For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.
Similar Strategies
The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.
Before expiration and assignment
The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
