Question

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

Answer 1

To make out the difference between protective put and straddle, we must frist describe the both. So the below mentioned is the definitions of these two.

Protective Put- A protected put is option trading where investor already owing same quantity of same share and investor also buy a put for the same quantiy. This will secure your investment if there is fall in the price and if there is rise in the price, the investor participates fully. Only cost of put is involved in the transaction.

Straddle- Straddles are option strategy that allows an investor to benefit from movement in the market irrespective of the stock moves up or down. In this option, the investor buys equal amount of call and put option with same expiration date. One thing to be noted that strike price is same for both put and call.

Based on the definitions above, both the strategy are in option market and followling difference can be jorted down.

1. In Protective put option, investor opts for put option specifically where in straddle, investor opts for both the options say put and call.

2. There may be any strike price prevailing in the market in case of protective put option where in straddle, both the call and put strike price should be same.

3. Protected put option is profitable only if the price goes up where as in case of straddle, there is no prediction on fall or rise of price. Hence, risk is more in case of straddle.

Hence as stated above, both the strategies are applicable in option market but some less or more risk invoved in each of them.