Option Strategies
Protective Call
Introduction
A Protective Call consists of a short position in a stock and a long position in a call Option for the same amount of stock. Protective calls aim to hedge the short position of a stock with a long ATM or slightly OTM call Option. At any time for American Options or at expiration for European Options, if the stock moves below the strike price, the Option contract becomes worthless but the short position acquires an unrealized gain. If the underlying price moves above the strike, you can exercise the Options contract and receive the underlying Equity, which closes your short position.
Implementation
Follow these steps to implement the protective call strategy:
- In the
initialize
method, set the start date, end date, cash, and Options universe. - In the
on_data
method, select the Option contract. - In the
on_data
method, place the orders.
def initialize(self) -> None: self.set_start_date(2014, 1, 1) self.set_end_date(2014, 3, 1) self.set_cash(100000) self.universe_settings.asynchronous = True option = self.add_option("IBM") self._symbol = option.symbol option.set_filter(lambda universe: universe.include_weeklys().naked_call(30, 0))
The naked_call
filter narrows the universe down to just the one contract you need to form a protective call.
def on_data(self, slice: Slice) -> None: if self.portfolio.invested: return chain = slice.option_chains.get(self._symbol) if not chain: return # Find ATM call with the farthest expiry expiry = max([x.expiry for x in chain]) call_contracts = sorted([x for x in chain if x.right == OptionRight.CALL and x.expiry == expiry], key=lambda x: abs(chain.underlying.price - x.strike)) if not call_contracts: return atm_call = call_contracts[0]
Approach A: Call the OptionStrategies.protective_call
method with the details of each leg and then pass the result to the buy
method.
protective_call = OptionStrategies.protective_call(self._symbol, atm_call.strike, expiry) self.buy(protective_call, 1)
Approach B: Create a list of Leg
objects and then call the combo_market_order, combo_limit_order, or combo_leg_limit_order method.
legs = [ Leg.create(atm_call.symbol, 1), Leg.create(chain.underlying.symbol, -chain.underlying.symbol_properties.contract_multiplier) ] self.combo_market_order(legs, 1)
Strategy Payoff
The payoff of the strategy is
CKT=(ST−K)+PT=(S0−ST+CKT−CK0)×m−fee whereCKT=Call value at time TST=Underlying asset price at time TK=Call strike pricePT=Payout total at time TS0=Underlying asset price when the trade openedCK0=Call price when the trade opened (credit received)m=Contract multiplierT=Time of expirationThe following chart shows the payoff at expiration:

The maximum profit is S0−CK0, which occurs when the underlying price is 0.
The maximum loss is S0−K−CK0, which occurs when the underlying price is above the strike price.
Example
The following table shows the price details of the assets in the algorithm:
Asset | Price ($) | Strike ($) |
---|---|---|
Call | 3.50 | 185.00 |
Underlying Equity at start of the trade | 186.94 | - |
Underlying Equity at expiration | 190.01 | - |
Therefore, the payoff is
CKT=(ST−K)+=(190.01−185)+=5.01PT=(S0−ST+CKT−CK0)×m−fee=(186.94−190.01+5.01−3.50)×m−fee=−1.56×100−2=−158So, the strategy loses $158.
The following algorithm implements a protective call Option strategy:
class ProtectiveCallAlgorithm(QCAlgorithm): def initialize(self) -> None: self.set_start_date(2014, 1, 1) self.set_end_date(2014, 3, 1) self.set_cash(100000) option = self.add_option("IBM") self.symbol = option.symbol option.set_filter(lambda universe: universe.include_weeklys().naked_call(30, 0)) self.call = None # use the underlying equity as the benchmark self.set_benchmark(self.symbol.underlying) def on_data(self, slice: Slice) -> None: if self.call and self.portfolio[self.call].invested: return chain = slice.option_chains.get(self.symbol) if not chain: return # Find ATM call with the farthest expiry expiry = max([x.expiry for x in chain]) call_contracts = sorted([x for x in chain if x.right == OptionRight.CALL and x.expiry == expiry], key=lambda x: abs(chain.underlying.price - x.strike)) if not call_contracts: return atm_call = call_contracts[0] protective_call = OptionStrategies.protective_call(self.symbol, atm_call.strike, expiry) self.buy(protective_call, 1) self.call = atm_call.symbol