Contents

Collar

Collar can be visualized as a covered CALL plus a protective PUT. This strategy is mainly used by investors to protect or lock in their unrealized profits. The downside risk is protected by the PUT. The upside profit is limited by the CALL.

You can buy the protective PUT using the premium received from the CALL sold thereby creating a zero cost collar. It can created at Net credit as well by selling a CALL with high premium and buying a PUT with low premium.

Trade Set-Up

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Own Stock

Buy Future or Stock-Finvezto

Buy OTM PUT

Naked Put-Finvezto

Sell OTM CALL

short call-Finvezto

Collar

bull spread-Finvezto

Entry Checklist

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Market Outlook
  • When you have made decent profits from the stock you own and looking to lock the profits before completely selling it off.
  • Volatility
  • Sell CALL and buy PUT when the volatility is high and on the rise
  • Strike Price
  • Sell the CALLs at a strike price above the resistance zone identified, preferably OUT-of-the-Money CALLs that expire worthless
  • Sell the PUT right below the support zone or the stop loss level of the stock
  • Risk Profile

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    Risk [Loss]
  • Maximum Loss is limited and occurs when price falls below the strike price of the PUT bought.
  • Reward [Profit]
  • Maximum profit is when the price ends at the strike price of the sold CALL option during expiry. The stock price would have appreciated and the options would have expired worthless.
  • Break Even Point
  • The stock price minus the premium received through selling the CALL option plus the premium paid for the PUT option
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is helpful if the price of the stock is closer to the CALL sold
  • Volatility impact [Vega]
  • If the volatility drops when your position is profitable, it is helpful
  • Increase in volatility is harmful when the position is profitable and close to expiry.
  • Trade Management & Exit

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    Rolling & Adjustments
  • The position is already well hedged. You need to just hold it till expiry.
  • Stop Loss
  • Protective PUT will take care of the STOP Loss.
  • Exit Conditions
  • Typically investors hold this strategy till expiry. But, if the CALL premium has decayed considerably, you might want to exit it before expiry and just hold the PUT.