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Return to Options Strategy

This strategy is used to help minimize a loss if a stock was to decline in value.

With a collar strategy one can know the maximum potential of a loss, while realizing the potential

Example; We own or we buy, XYZ stock at 35.15 and we write (sell) next month out 35.00 strike price call for 2.50 and we buy a put the same month 25.00 strike price at 1.00.

1. We own the XYZ stock at 35.15                                             

2. We bought the put at 1.00                                                          

3. We receive the premium for writing the call 2.50                   

• Break even would be 33.65 (35.15 + 1.00 = 36.15 – 2.50 = 33.65
• XYZ stock by the option expiration drops below 35.00 we keep the YXZ stock, And the premium of 2.50 – 1.00 (cost of the put) = 1.50 profit.
• XYZ stock stays above 35.00 we get called out on our XYZ stock, and receive 35.00,         

We keep the premium of 2.50   35.00 +2.50 = 37.50- 35.15= 2.35-1.00 = 1.35

XYZ Cost 35.15, Put Cost 1.00, received from the XYZ sale 35.00 received from  

Writing the call 2.50 for a profit of 1.35.

Note:

We did not take into consideration, commissions and interest on margins.

Depending on how many XYZ shares we bought, would determine the cost of commissions and also the interest on margin used, if any.