Collar, hedge wrapper, collar strategy…
If the options trading definitions and lingo is starting to sound foreign, don’t give up.
With so many option trading strategies available to traders, it can be difficult to determine the most profitable option strategy.
David Jaffee of BestStockStrategy.com has spent years testing and refining his strategy to minimize risk while maximizing the probability of profit.
While you can start trading without a lot of background knowledge, successful traders are always looking to grow and improve.
Keep reading to learn about the collar option strategy, including why investors may choose to use this strategy.
What is a collar position?
A collar position is made up of three components.
- A long underlying asset
- A long put option
- A short call option
To create a collar position, the trader must hold an underlying stock, purchase an out of the money put option, and sell a call option that is out of the money.
The long position helps the trader earn a profit as the price of the underlying stock increases. If the price decreases, the trader will be at a loss.
The value of the put option increases if the price of the underlying stock decreases.
The put option helps counterbalance and neutralize the consequences of a falling stock price.
The short call option can be exercised by the option buyer if the price of the underlying stock increases.
The short call option seller keeps the option premium for selling the option and the underlying shares can be called away if the call option expires in the money.
Through his highly rated options trading course, David Jaffee teaches students how to manage loss and maximize their profits.
Why do investors use a collar position?
Traders can use a collar option strategy to limit their potential losses and gains.
Investors may use a collar option strategy if they have a long position in an underlying asset and want to hedge against short-term risks.
A collar position can help protect an investor against major losses if they hold a long position because the put option gains if the underlying asset decreases in price.
The put option can be financed / paid for by selling the covered call option.
The break even point on a collar options trading strategy is the net of the premiums paid and received for the put and call subtracted from or added to the purchase price of the underlying stock depending on whether there is a credit or debit.
Collars are considered more flexible in some cases, and they can be adjusted to create bigger strategy positions.
Learning the best option trading strategies can help you make smart moves and win most of your trades.
What is a zero-cost collar?
A collar strategy is considered a zero-cost collar if the full cost of the put option can be covered by the sale of the call option.
The call and put options essentially cancel each other out.
With a zero-cost collar, traders run the risk of limiting their potential profits if the call option expires in the money.
If the price of the underlying asset increases, the potential gains for the trader are capped.
However, investors implement the strategy to cap potential losses and hedge against volatility.
What is a reverse collar option strategy?
A reverse collar option strategy, or reverse collar, is exactly what the name implies.
While a collar option strategy involves buying a put option and selling a call option, a reverse collar involves buying calls and selling puts.
Minimize Risk when Trading Options
Learning about the various trade structures is important, but will it help you make money?
To become a successful options trader, you have to minimize risk and learn to manage losses.
As a top options trading coach, David Jaffee has taught more than 1,500 students how to profitably trade options by selling option premium.
Instead of riding the roller coaster of big wins and big losses, traders can learn how to earn consistent profits and win 95% or more of their trades.
If the collar option strategy seems complicated, visit BestStockStrategy.com to learn a simpler way to learn the best way to achieve high returns for stock market traders.