Collar Options Trading Strategy
Collar is just one another multi-legged options trading strategy which is practiced when the trader is not so sure about the underlying stock price movement. Collar options trading strategy is a low risk low profit options trading strategy which is followed by traders holding stocks to protect them from falling of the stock price. In collar options trading, the maximum profit and maximum loss are predefined values.
Collar options traders usually employ a 1:1 ratio of call and put options; usually both are out of money. The trader, in order to protect the stocks he holding, buys a protective put option and writes a call option, usually by ensuring a credit. The maximum profit occurs when the call option expires in the money; where the profit is the strike price of call option minus purchase price of the stocks holding plus the credit of setting up the position. The maximum loss occurs when the put option expires in the money; where the profit is the purchase price of the stocks holding minus strike price of put option minus the credit of setting up the position.
Collar options trading strategy work well when used with covered calls strategy. Collars are good for novice traders and stock traders having less risk tolerance. Collar options trading strategy is best suited where market is highly volatile and is not suited for traders looking for high profits.
Collar options traders usually employ a 1:1 ratio of call and put options; usually both are out of money. The trader, in order to protect the stocks he holding, buys a protective put option and writes a call option, usually by ensuring a credit. The maximum profit occurs when the call option expires in the money; where the profit is the strike price of call option minus purchase price of the stocks holding plus the credit of setting up the position. The maximum loss occurs when the put option expires in the money; where the profit is the purchase price of the stocks holding minus strike price of put option minus the credit of setting up the position.
Collar options trading strategy work well when used with covered calls strategy. Collars are good for novice traders and stock traders having less risk tolerance. Collar options trading strategy is best suited where market is highly volatile and is not suited for traders looking for high profits.
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posted by Daniel Pipitone at
4:43 AM
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