Question

Question 8. Describe the difference between a protective put and a straddle. In which situation would the straddle result in a higher profit?

Answer 1

Difference between protective put and straddle-

When a trader buy a stock and put option to cover the loss due fall in stock price,it is called Protective put strategy.The cost for protecting downside in this strategy is the amount of put premium that a trader pays to buy put option.

When a trader buys both the call and put options with the same expiry date and same strike price,it is called straddle.The cost for this strategy is the sum of amount of premium paid for both the call &put option premium.

When straddle result in higher profit-

A straddle will be profitable when the price of stock falls or rise by an amount greater than the cost paid for this strategy(i.e. sum of call&put option premium).

A straddle will result in higher profit when there is sharp move in the stock price either upwards or downwards.