Collar Option Strategy : We write the call which produces an income and allows a trader to profit on stock up to strike price. The investor will execute a collar if they are long stock with substantial unrealized gains. The investor will consider if they are bullish on the stock over the long term but they are unsure of short term prospects. The project will gain a downside move in the stock and implement the collar options strategy. The protective collar will involve two strategies known as a protective put and covered call. The protective put involves a long put option and underlying security. The covered call involves a long underlying security and short a call option. The call and put have the same expiry month and number of contracts. The collar is the best strategy for beginner and allows a trader to capitalize on the upside.
We use collars if they are bullish on the stock for the long run. An investor may use a collar when they have gain in stock without risk. The investor implements a collar option strategy to protect the profits which is already generated. The investor will purchase an out of the money put option, which protects against a price drop in the stock to use a collar. This option is constructed by holding shares of the underlying stock while buying protective puts and selling call options. The option consists of buying the stock then buying a put option at strike price and selling a call option at strike price. The strategy is executed when the investor want the downside protection without paying. The strategy is applied to both short-term and long-term positions.
view moreThe max profit is equal to the strike price of short call minus Purchase Price of Underlying plus the Net Premium Received minus Commissions Paid. Then Max Profit Achieved When Price of Underlying is greater than equal to Strike Price of Short Call.
Loss : The Max Loss is equal to the Purchase Price of Underlying minus Strike Price of Long Put minus Net Premium Received plus Commissions Paid. Max Loss Occurs When Price of Underlying is less than equal to Strike Price of Long Put
Breakeven Point : The Breakeven Point is equal to the Purchase Price of Underlying plus Net Premium Paid.
Suppose the trader has 100 shares of the stock XYZ and currently trading at $48 in June. Then they decide to establish a collar by writing JUL 50 covered call for $2 and purchase a JUL 45 put for $1.He will pay $4800 for the 100 shares of XYZ, and $100 for the put but received $200 for selling the call option. The total investment is $4700.The expiration date had rallied by 5 points to $53. The striking price of $50 for the call option is lower than the trading price of the stock. Here the call is assigned and the trader sells the shares for $5000 which results in a $300 profit.
The beauty of the collar is that we understand the gains/loss from start in any trade. While returns are muted in an explosive bull market due to selling the call. The trader gives up the potential for huge gains in exchange for limiting losses. They are very little sensitive to changes in implied volatility as it has short one option and long another The collar position is created by holding underlying stock, buying an out of money put option than selling an out of the money call option. The option is used when investors want to hedge a long position in the underlying asset from short-term downside risk.
© 2020 All rights reserved My blogs (Posts) and videos is only educational purpose on stock market and depend on my self research and analysis. I can't advice to buy/sell any stock. because I'm not SEBI registered.If someone wants to inter the stock market, then my advice is first learn from an authorize institution or take advice from your authorized adviser.
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