Equity option collars
A collar is an options trading strategy that is constructed by holding shares of the underlying stock while simultaneously buying protective puts and selling call options against that holding.
The puts and the calls are both out-of-the-money options having the same expiration month and must be equal in number of contracts. Technically, the collar strategy is the equivalent of a out-of-the-money covered call strategy with the purchase of an additional protective put. The collar is a good strategy to use if the options trader is writing covered calls to earn premiums but wish to protect himself from an unexpected sharp drop in the price of the underlying security.
The underlier price at which break-even is achieved for the collar strategy position can be calculated using the following formula. Let's take a look. While we have covered the use of this strategy with reference to stock options, the collar strategy is equally applicable using ETF options, index options as well as options on futures.
However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker.
What is Equity Collar? definition and meaning
Traders who trade large number of contracts in each trade should check out OptionsHouse. The beauty of using a collar strategy is that you know, right from the start, the potential losses and gains on a trade.
While your returns are likely to be somewhat muted in an explosive bull market due to selling the call, on the flip side, should the stock heads south, you'll have the comfort of knowing you're protected. The following strategies are similar to the collar strategy in that they are also bullish strategies that have limited profit potential and limited risk.
Equity Collars
If capital protection rather than premium collection is the main focus, a bullish investor can establish an alternative collar strategy known as the costless collar. Your new trading account comes with a virtual trading platform which you can use to test out your trading strategies without risking hard-earned money.
Buying straddles is a great way to play earnings.
Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time Cash dividends issued by stocks have big impact on their option prices.
The Collar Strategy Explained | Online Option Trading Guide
This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement.
In place of holding the underlying stock in the covered call strategy, the alternative Some stocks pay generous dividends every quarter.
You qualify for the dividend if you are holding on the shares before the ex-dividend date To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions.
They are known as "the greeks" Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account.
You should not risk more than you afford to lose.
Collar (finance) - Wikipedia
Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service.
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