Strategies

A  A  A     

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.

The 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 world events, and you are seeking low cost stock protection for the next few weeks.

Possible strategy:    The Collar:

                                

                                  Buy one XYZ Sept 55 strike put at $1.25

                                  Sell one XYZ Sept 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)    

In Summary: It is possible to collar your stock position for downside protection with little or no cash outlay.  Ensure your strike price selection matches your acceptable exit points for the stock. With the purchase of the put you have the right but not the obligation to sell shares of stock. With the sale of the call you have the obligation to sell shares of stock if assigned.

CBOE Volatility Index (VIX)