What is a collar option?
- 1. What is a Collar Option? 1 Options Trading
- 2. Collar Options Strategy You can build a Collar by buying 100 stock, selling 1 Call option and buying 1 Put option. Here is how it looks like on a risk graph. 2
- 3. Collar Options Strategy As you can see the risk graph is very similar to a Bull Call Spread. However there is a big difference. Here you have to buy 100 stocks and sell 1 call against it and buy 1 put as a protection. So it is a much more capital intensive Options Strategy. Honestly I have no idea why people use this. I have heard people talking about Zero Cost Collar which is when you sell a Call and buy a Put at the same price so the collar had zero cost. But it never made sense for me. Why do you want to build a Collar with a lot of capital when you can create a Bull Call Spread easily without having to hold the stock and allocate high margin (buying power) for it. 3
- 4. Call Spread or Collar Options Strategy? If you are looking for a limited risk, limited profit potential Options Strategy I would recommend buying a Call Spread instead of a Collar. Your capital will be less tied, you will have more free capital to allocate to other trading ideas and strategies. I would never choose a Collar instead of a Call spread. 4
- 5. When would you use this? If for some reason you are obligated to hold stocks, then you can convert it to a Collar by selling a higher strike Call and buying a lower strike Put as a protection. But keep in mind that if the stock price goes beyond your shorted Call strike it will be called away from you so you have to sell your stocks. If you never want to be assigned, don't do a Collar because it has a high risk that the stocks will be called from you and you will be obligated to sell them. So this is not a longterm strategy for a stock holder. You can argue that you can sell a way out-of-the-money (OTM) call strike but then you don't get any reasonable premium for it, so why bother? 5
- 6. Feel free to ask me! 6 Email: gery@optionsrules.com My webpage: http://www.optionsrules.com/ You can find me: Facebook: https://www.facebook.com/OptionsRules1 YouTube: https://www.youtube.com/user/optionsrules Twitter: https://twitter.com/optionsrules LinkedIn: http://hu.linkedin.com/pub/gery-nagy/6a/513/261 Skype: opcioguru