In the book of Exam, Volume 1, Exam 2, Morning Session, page 82, n°43 we are asked to compute the expected loss of two protective puts.
The first one is a protective put from with a 39 DEC. So the PnL is: (St-42.28)+(max(39-St,0)-4.2) The second is a protective put from with a 38DEC. So the PnL is: (St-42.28)+(max(38-St,0)-3.62)
Note that the question is EXPECTED LOSS and not MAXIMUM LOSS
We also are given the probabilities of the move and the value of the move, so that the expected price is E§=38.8.
So for me, the difference in expected loss is simply; E(PnL(S))-PnL(S))=(38.8-42.28)+(max(39-38.8,0)-4.2) - ( (38.8-42.28)+(max(38-38.8,0)-3.62)). If we multiply by the number of stock: 140,000. We get 53,200$.
However, the correect answer is 58,800$. In the anwser page 223, they compute the maximum loss, which is different from the expected loss.
The payoff profiles are the same, but one disadvantage I could think of the protective put over long calls would be the cash required to purchase the stock and the put options, whereas with the call you’re simply just using cash to buy the call and will require less of a capital outlay to get the exposure you’re seeking. Now if you already own the stock and are just simply looking to hedge it over, say, an earnings announcement, you could pay a premium to purchase a put option to protect you over that event and retain ownership of the shares.
Covered call is synthetically equivalent to a short put, not long.
It depends on the strategy or position an investor must hold. It is not the same a protective put and a long call. In a long call I want to buy the underlying asset or just speculate about its price. In the other hand, a protective put can be formed when the investor holds the underlying asset (its long the asset), but wants to prevent a loss from underlying asset price fall (like an insurance).
The simile of a covered call would be a short put.
Again, in a covered call, the investor is long the underlying asset (holds / owns the underlying asset), but the investor has a neutral look of the underlying asset (its price will not increase at least). So, In order to increase profits, the investor writes a put (short put) to earn the premium as income. Take note that in both, covered calls and protective puts, the investor would be obliged or willing to hold the underlying asset, so it is not the same as owning the option that emulates the payoff of those strategies.
A short put has the intention to sell the underlying for a price or just speculate about its price.