InvestorQ : Can I use insurance also if I am short on the markets via futures?
Tisha Malhotra made post

Can I use insurance also if I am short on the markets via futures?

Answer
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Moii Chavate answered.
2 years ago


A protective call is also a bearish strategy but it comes with a built in insurance. The problem with buying naked put options is that you end up paying a huge premium and more often than not it is difficult to recover the premium amount. That is the reason that in 95% of the cases the option sellers make money while option buyers lose money. An alternate strategy could be protective call where you sell futures and protect it by purchasing a higher call option. In the Cummins example, if you can sell Cummins Futures at Rs.960 and protect yourself with a 970 call option at Rs.12, then your maximum risk is still Rs.22 as in the case of the naked option. But then your breakeven point is Rs.948 as at that point you will cover the cost of the put option too. Remember, when you sell futures there is higher margin payable and also you are subject to payment of mark to market margins. But this strategy essentially brings down your breakeven point.