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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
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Michael C. Thomsett, author
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Thomsett Options
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Getting Started in Stock Investing and Trading
  • Mastering The Collar As A Protective Options Strategy 0 comments
    Apr 5, 2013 3:25 PM
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    The problem for anyone in the market is the threat of loss. Owning stock means you risk a decline in the price, and this is where some specific options-based protective strategies are exceptionally valuable. One such strategy is the collar.

    The collar has three parts: 100 shares of stock, a short call, and a long put. If the stock price rises, the call is exercised and the stock is called away. As long as the strike is higher than your basis in the stock, your profit comes from the option premium plus capital gains on the stock. However, exercise can also be avoided by closing the call or rolling it forward.

    If the stock price declines, the short call will expire worthless or can be closed at a profit. The long put will grow in value point for point with decline in the stock once the put is in the money. This strategy limits profit while putting a ceiling on losses. So while it is not going to create large profits, it does protect you.

    The collar often is entered in stages, not all at once. For example, your stock rises and you sell a covered call. However, the stock then begins to decline. Rather than close the call and sell the stock, you open a long put to protect against the decline, should it continue.

    The strikes of the typical collar are both out of the money. If your concern is that the stock could slide downward, the collar is a sensible strategy that also helps you avoid selling, if that is the only alternative. This is an example of how options can be used to manage your portfolio, reduce risk, and minimize the cost of the strategy itself. you might have purchased stock at a lower price and sold a covered call, and now want to protect against the possibility of a price decline. Transforming a covered call into a collar makes sense in this situation.

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. As a new member, if you buy a one-year subscription, you also get a free copy of one of my books, including this new one just released.

    I also offer a weekly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. All it requires is your e-mail address. Join at Weekly Newsletter I look forward to having you as a subscriber.

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