Strategies · Library · Options
§2.5Hedges and structures
Protective call
Short the shares and buy a call at or above today's price as insurance against a squeeze. The loss on a rally is capped at the call strike plus the premium paid.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Bearish on the stock but wants a ceiling on the loss if it spikes.
- Entry and exit
- Short the shares and buy one at-the-money or slightly out-of-the-money call per 100 shares for the period of concern. Cover both at expiry or when the thesis plays out.
- Sizing
- 1:1 (one long call per 100 shares shorted)
How it fails
- Maximum loss is the strike gap plus the premium paid
- Gain is limited because a stock cannot fall below zero
- Premium reduces profit; call time decay hurts
- Short borrow costs
Data it needs
- options chain with strikes and premiums
- underlying daily price
- dividends and borrow cost
ARCANE has the underlying daily close but no options chains, strikes or implied volatilities
How ARCANE uses it
Matches a bearish Call with a defined invalidation level, such as "the stock falls unless it closes above a set price". Paper only.
Needs a short stock leg and a long call.
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.5, p. 20 of the SSRN version. Described in our words. Hedges and structures is ARCANE’s filing, not the book’s.