Strategy: Buy n ATM Calls, ≥ 90 DTE
Short n × 100 Shares
Example:
Price Chart: Downtrending off of resistance
Current IV%: ≤ 20%
IV Rank: ≤ 30
Trade: Buy n ATM call options.
Typical Strike Delta:
Long Calls ≈ −0.50 to −0.45
Goals: Hedge the value of a short stock position held in the trader’s account when the market rallies contrary to a trader’s bearish bias.
Manage: If a rally in the price of the underlying security occurs, the long call option moves deeper ITM and offsets a portion of the trader’s short stock value. If a protective stop is placed at a price above the short stock position (see Loss in the following paragraphs) and the price of the underlying experiences a strong rally, the short stock would be closed and the protective call could return a profit as it moves deeper ITM, although this is not the original intention of a protective call.
Profit: Hedging strategies are intended to partially offset a loss for risk management and are not intended to return a profit.
Loss: The protective call partially offsets a loss in the price of the shorted stock. Note that a conditional protective stop order could also be added a few dollars above the entry price of the short stock to limit the loss.