Stock Collar Option Strategies
Stock Collar – There are two types of Collars, Protective and Appreciating. Both are used for stocks that you own, or want to own, for the long term.
Protective Collar – When you already own the stock and don’t want to sell it, but you are Bearish in the short term. Buy ATM Put and Sell ATM Call to finance the Put. This isn’t really a trading strategy, but is presented here for illustration purposes. The risk is the net debit, if any calculated as the Cost of Put - credit received for sale of Call. If you can make this trade with enough credit to cover your commissions, you have locked your stock price at the strike price of the options until they expire.
Appreciating Collar – When you want to own the stock for the long term, but you are Bearish on the stock or the stock market in the short term. Buy ATM Put and Sell OTM Call to finance the Put. Most profitable when volatility is high and there is a skew between prices of Puts and Calls.
Entry Rules
Bullish expectations for the underlying asset, but concern that overall market or news may cause short term drop in asset price.
Most profitable when volatility is high and there is a skew between prices of Puts and Calls.
Exit Rules
Hold position until expiration
- Stock closes below Put strike price: Call expires worthless. Sell Put for profit to cover loss on stock, or exercise Put to sell stock at strike price.
- Stock closes above strike price: Put expires worthless. Stock is Called away by ITM Call option.
- Stock closes at strike price: Nothing to do. Calls and Puts expire worthless. Sell stock or create a new collar.
Profit & Loss Calculations (When strike price of Put is same as the stock price)
Maximum Risk – Cost of Put- Credit received for Call. ($3 - $1 = $2)
Maximum Profit – Limited to difference in strike prices – net debit paid, if any. $55 - $50 - $2 = $3.
Breakeven – Current stock price (or strike price of Put) + net debit paid $50 + 2 = $52
For Example:
Buy 100 shares ABC stock at $50
Buy 1 ATM Put at $50 strike for $3
Sell 1 OTM Call at $55 strike for $1
Maximum Risk: $3 - $1 = $2
Maximum Profit: $55 - $50 - $2 = $3.
Breakeven: $50 + 2 = $52
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