The Collar Strategy
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This graph indicates options put spread collar and loss at expiration, respective to the stock options put spread collar when you sold the call and bought the put.
Buying the put gives you the right to sell the stock at strike price A. You can think of a collar as simultaneously running a protective put and a covered call. Some investors think this is a sexy trade because the covered call helps to pay for the protective put. The call you sell caps the upside.
If the stock has exceeded strike B by expiration, it will most likely be called away. So you must be willing to sell it at that price. Some investors options put spread collar try to sell the call with enough premium to pay for the put entirely. Some investors will establish this strategy in a single trade.
This limits your downside risk instantly, but of course, it also limits your upside. From the point the collar is established, potential profit is limited to strike B minus current stock price minus the net debit paid, or plus net credit received.
From the point the collar is established, risk is limited to the current stock price minus strike A plus the net debit paid, or minus the net credit received. For this strategy, the net effect of time decay is somewhat neutral. It will erode the value of the option you options put spread collar bad but it will also erode the value of the option you sold good. After the strategy is established, the net effect of an increase in implied volatility is somewhat neutral.
The option you sold will increase in value badbut it will also options put spread collar the value of the option you bought good.
Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risksand may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.
The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or options put spread collar advice.
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The Strategy Buying the put gives you the right to sell the stock at strike price A. Both options have the same expiration month. Break-even at Expiration From the point the collar is established, there are two break-even points: If established for a net credit, the break-even is current stock price minus net credit received.
If established for a net debit, the break-even is current stock price plus the net debit paid. The Sweet Spot You want the stock price to be above strike B at expiration and have the stock called away.
Maximum Potential Profit From the point the collar is established, potential profit is limited to strike B minus current stock price minus the net options put spread collar paid, or plus net credit received.
Maximum Potential Loss From the point the collar is established, risk is limited to options put spread collar current stock price minus strike A plus the net debit paid, or minus the net credit received. As Time Goes By For this strategy, the net effect of time decay is somewhat neutral.
Implied Volatility After the strategy is established, the net effect of an increase in implied volatility is somewhat neutral.