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Collars |
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Also known as a fence or cylinder, collars are used by traders to protect an existing stock position.
When the stock position the investor wants to protect is long, a collar is created by combining covered calls with protective puts. Many senior executives at publicly traded companies also use collars as a means to protect their personal wealth, which is often heavily concentrated in their company's stock. By collaring their stock, executives can assure the value of their stock without having to pay huge premiums for put insurance.
In regards to profitability, a collar behaves identically to a bull spread. The upside is restricted beyond the strike price of the short call, while the downside is protected by the long put. For example: An investor purchased 100 shares of Sun Maid at $12.84 in May and wants protect his downside with little or no cost to himself. The trader then creates a collar by buying one JUL 10 Put at $0.60 and selling one JUL 15 Call at $0.80. The long stock then behaves the same as any long stock position would--it gains when the stock rises and it loses when the stock falls.
The maximum profit is achieved, however, when the stock is at $15. Above 15, the profit on the stock is offset precisely by the loss on the call option sold. On the downside, the maximum loss happens when the stock is at or below $10. Below $10, the profit from the put counterbalances the loss from the stock.
The collar strategy is best utilized by investors seeking a conservative strategy that offers a sound rate of return with managed risk and possible tax advantages. The secret to implementing the collar strategy is being able to select the appropriate put and call combinations that allow for profit while still protecting the downside risk.
A lot of investors will roll the puts and calls in the collar strategy each month, thereby locking in a 3-5% monthly return. By rolling, investors buy back the short calls and sell new calls for a later month and perhaps a different strike price, and do the same in regard to the puts, therefore adjusting the collar based on the movement in the stock price. As there may possibly be tax benefits associated with long term capital gains on the stock in the collar strategy versus short term capital gains in a pure option strategy, investors should consult their tax advisors.
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| Symbol |
Rate |
| GBP:CHF |
1.747703 |
| GBP:JPY |
155.484239 |
| GBP:USD |
1.638403 |
| NZD:USD |
0.627050 |
| EUR:CAD |
1.545998 |
| EUR:CHF |
1.516857 |
| EUR:GBP |
0.867915 |
| EUR:JPY |
134.947096 |
| EUR:USD |
1.421994 |
| AUD:JPY |
76.394373 |
| AUD:USD |
0.805000 |
| USD:CAD |
1.087204 |
| USD:CHF |
1.066711 |
| USD:JPY |
94.899879 |
| USD:SEK |
7.613010 |
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Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
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History