is a protective put equivalent to a long call

Expert Solution

A protective put is sometimes also referred as synthetic long call, because its profit and loss potential is the same as buying a basic call option.

As it implies a protective put is used to hedge, or protect against losses on the value of the stock where as long call is to Participate in market.

How to set up Protective put:-

1). Purchase/own stock

2). Buy put option on same stock.

The investor who enters this strategy wants the stock to trade higher, but also wants protection in case the stock price falls below strike price, giving the investor the right to sell the stock.

Example:- company ABC's current market price of stock is $50. So we decide to buy a stock at market price and buy a put option at $40 with $2 premium.

So if price of stock on expiration is $60, then we will earn $8( 60-50-2).

And if price of stock on expiration is $30, then we will lose $8(50-40-2).

Here our intension was to protect or hedge out portfolio.

jeff jeffy answered 2 years ago

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