A collar option strategy involves buying 100 shares of stock while simultaneously selling a call option and buying a put option on the same stock. This limits the risk of losses on the stock but also limits upside potential if the stock rises significantly. The document recommends a call spread strategy instead of a collar since it requires less capital tied up in the underlying stock and allows for more flexibility. Collars make more sense if one is already obligated to hold the stock and wants to hedge downside risk.

1. What is a Collar Option?
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Options Trading

2. Collar Options Strategy
You can build a Collar by buying 100 stock, selling 1 Call
option and buying 1 Put option. Here is how it looks like
on a risk graph.
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3. Collar Options Strategy
As you can see the risk graph is very similar to a Bull Call
Spread. However there is a big difference. Here you have
to buy 100 stocks and sell 1 call against it and buy 1 put as
a protection. So it is a much more capital intensive
Options Strategy.
Honestly I have no idea why people use this. I have heard
people talking about Zero Cost Collar which is when you
sell a Call and buy a Put at the same price so the collar had
zero cost. But it never made sense for me. Why do you
want to build a Collar with a lot of capital when you can
create a Bull Call Spread easily without having to hold the
stock and allocate high margin (buying power) for it.
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4. Call Spread or Collar Options Strategy?
If you are looking for a
limited risk, limited profit
potential Options Strategy
I would recommend
buying a Call Spread
instead of a Collar.
Your capital will be less tied, you will have more free
capital to allocate to other trading ideas and strategies. I
would never choose a Collar instead of a Call spread.
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5. When would you use this?
If for some reason you are obligated to hold stocks, then
you can convert it to a Collar by selling a higher strike Call
and buying a lower strike Put as a protection. But keep in
mind that if the stock price goes beyond your shorted Call
strike it will be called away from you so you have to sell
your stocks. If you never want to be assigned, don't do a
Collar because it has a high risk that the stocks will be
called from you and you will be obligated to sell them. So
this is not a longterm strategy for a stock holder.
You can argue that you can sell a way out-of-the-money
(OTM) call strike but then you don't get any reasonable
premium for it, so why bother?
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6. Feel free to ask me!
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