Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Protecting Your Portfolio with a Collar

Example:                 You are long 100 shares of XYZ stock.  Your initial purchase price was well below the current price of $60 and your focus is to protect your accrued gains. 

Outlook:                  Unsure about upcoming product announcements you are seeking low cost protection for the next couple weeks.

Possible strategy:    The Collar:                               

                                  Buy one XYX Nov 55 strike put at $1.25

                                  Sell one XYZ Nov 65 strike call at $1.40

                                                              Net credit      $  .15

 

*All values shown are at the time of expiration. Commissions and other trading fees not included.

XYZ Stock

Long 55 Put

Short 65 Call

Stock Value

Collar Credit

Net
Profit/(Loss)

50

$500

0

$5,000

$15

($485)

55

0

0

$5,500

$15

($485)

60

0

0

$6,000

$15

 $15

65

0

0

$6,500

$15

$515

70

0

($500)

$7,000

$15

$515

 

 

At Expiration:

  • Maximum Profit = $515
  • Breakeven = XYZ at $59.85
  • Maximum Loss =($485) 

SUMMARY: It is possible to collar your stock position for downside protection with little or no cash outlay.  Remember to choose the proper strike prices to achieve your portfolio protection goals.