The Complete Guide to Option Strategies: Advanced and Basic Strategies on Stocks, ETFs, Indexes, and Stock Indexes

CHAPTER 21

Collar

A collar consists of a covered call and a protective put. In a collar, the stock is essentially “collared” between two options. A collar can be executed where there is a one-to-one ratio of options sold versus stock owned, or it can be ratioed (unbalanced) where there is a different number of calls versus puts or a different number of options relative to shares owned. To illustrate basic principles, this chapter will assume that one call option is sold for every put purchased in proportion to the long stock and that all options have the same expiration date. In this chapter, we discuss call versus put values, rolling, and the volatility skew.

OVERVIEW

A collar can be viewed as a covered call and a protective put. A collar is established by owning stock, selling an out-of-the-money call, and, in effect, using the proceeds to purchase an out-of-the-money put. In a collar, you know the highest and lowest dollar amounts you can potentially lose or gain. A collar combines a protective put in return, in effect, for the limited upside profit potential of a covered call. A collar is the equivalent of a short combination with long stock.

If the stock rises, this strategy performs like a covered call. If the stock declines, this strategy limits the loss at the put strike price (ignoring the premium for a moment). If the underlying stock closes above the call strike price at expiration, the long put will expire out-of-the-money and is worthless, and the investor will ...