The Option “Collar” Strategy to Hedge Your Stock Positions
The COLLAR is an option strategy use by owners of a stock to protect (or hedge) against drops in price of that stock. This trade is favored because of it’s simplicity, the low cost, and it’s effectiveness at protecting your profits in a stock at a time when it may be vulnerable to price drops. It can also give you a way to protect the position without selling the stock (and encountering the tax cost of selling your positions.)
It has three components:
- You own the stock.
- You sell a CALL option (a covered-write) at a strike just above the stock price.
- Use the credit from the CALL you sell to BUY a PUT option with a strike BELOW the stock price to protect from price drop.
If the stock’s price goes DOWN, you are protected from loss.
If the stock’s price doesn’t move the cost is small.
If the stock’s price goes UP, you can still make gains up to the strike price of the CALL.
The COLLAR is only one of over thirty strategies in the book. Learn to Trade Options Like the Pro’s: You’ll get the FAST-START method to learn options trading with your cell, tablet, or PC. Tips on opening an account and finding the suitable low commission rates available. Amazon Prime can download the Kindle version free, and you can read more about the book here at Amazon: http://bitly.com/OEPlaybook It’s new and up-to-date for 2015-2016. Thank you and good luck – Don A. Singletary – author