Collar stock option trading strategy

What is a collar?

The Collar option trading strategy involves being long the underlying stock while simultaneously selling an out of the money call, as well as purchasing an at the money or out of the money Put.

A major benefit of this strategy is a trader or investor can significantly cut the downside risk that is inherent in stock ownership through the Put purchase while at the very same time offset the cost of buying the Put by selling the out of the money Call.

The collar strategy yields its maximum profit when the stock is at or above the short call at expiration of the said short Call position.

It is important to understand that the passage of time (theta) will have a positive effect on the short call. but a negative effect on the long Put.

Any increase in implied volatility will have alternate effects on both legs of the strategy.

It is also possible to coordinate the position at very little cost, or even no cost at all. The position would then be referred to as a costless collar.

The chart above is an illustration of the following example.--

Buy 100 shares at $60.00

Buy 1 $50.00strike Put @ $10.00

Sell 1 $65.00strike Call @ $15.00

Break-even point= 55

Max gain= $1,000

Max loss= $500

This example illustrates you holding the collar option position through both option contracts expiration cycle. Remember, at expiration, all that is left in an options premium is the intrinsic value of the said option contracts.

The collar option strategy allows much opportunity. Through the proper risk management, knowing the reasons why you entered the trade, as well as your exit strategy, combined with the ability to make the necessary adjustments, one will be well on their way to trading the collar option strategy profitably.

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