The Collar: options trading strategy with put protector and call covering

The collar is realized departing from a bought position of stocks on which a put becomes a protector and a covered call so the price of exercise of the buy of the put is lower than the selling of the call. The fundamental objective of this strategy is to limit the price of selling the stocks inside a band of oscillation, being very important to realize the protection with a cost of zero, that is to say, the cost of the premium of the put is financed by the cashing of the premium of the call and if it was possible that the clear prime is received.

It is for this motive for which to this strategy zero usually add the terms of protector or of cost.

If the price of the underlying rise and overcomes the strike of the sold call, it will be exercised and, therefore, the maximum benefit is formulated of the following form:

Maximum benefit = Price of exercise of the sold call – Price of buy of the stocks – or clear premium (as it is paid or received, respectively)

Nevertheless, if it lowers the price of the underlying one below the strike of the put bought losses will have, at first, that limit themselves to the following formulation:

Maximum loss = Price of buy of the stocks – Price of exercise of the put bought – or clear premium (as it is paid or received, respectively)

Since it turns out to be logical, if the price of the underlying stock is between both prices of exercise (strike) the options will not be exercised and the result of the operation comes determined by the deadlock:

Price of buy of the stocks – or clear premium (as it is paid or received, respectively)

There will be benefit if the price is top and a loss in the opposite case.

The difficulty of this strategy is to manage to compensate the cost of the put bought by means of the selling of the call.

On the other hand, the result that is obtained by the collar is the same that the bought call spread. Both are equivalent, although the disintegrated composition of these strategies is distant very much, especially because in the collar one of the components is the portfolio of stocks.

A Lack of Trust

Frankly, I don’t trust in the fact that some stock broker out there can get me any better of a return that I can do myself.  This has never proven to be the case in the past. There are people who have been working for twenty, thirty, forty plus years, and who have seen almost half of their life-savings dwindle away within a matter of mere months.  I would never, and I mean NEVER allow that to happen while I am vigilantly watching my own portfolio.

We Are a Resilient People

Mostly however, I will continue to buy stock for that reason.  This is a great country; not the only great country in the world, but it is definitely a great one.  I understand the ebb and flow of the markets. Just before things came tumbling down we were experiencing a large real estate bubble.  Those things can’t go on forever, and in fact many people and hedge funds predicted that and capitalized on it greatly. An economy cannot continue to strengthen forever; you would begin to see serious inflation. There are times of recession, times of depression and times of economic boom.  Luckily, when you are trading your own portfolio of stocks, you can take advantage of it all.

Buy Low, Sell High

I almost hate to write the above-written title, because it almost sounds as if I’m saying “what goes up must come down”.  I am NOT saying that, and happen to know that markets trend.  Stocks tend to go up and tend to go down longer than you think they will.  Trying to buy a stock that is tanking downwards is like jumping in front of a steaming locomotive.  A very bad idea. Nevertheless, many stocks are at all time lows, and over the next months and years, as things in the economy begin to improve stock prices will surely have a good chance and rising once again.