Intermediate Options Strategies: Collar - Part Two

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...Continued From Part One

Benefit
This strategy offers the stock protection of a put. However, in returnfor accepting a limited upside profit potential on his underlyingshares (to the call’s strike price), the investor writes a callcontract.

Becausethe premium received from writing the call can offset the cost of theput, the investor is obtaining downside put protection at a smaller netcost than the cost of the put alone. In some cases, depending on thestrike prices and the expiration month chosen, the premium receivedfrom writing the call will be more than the cost of the put.




Inother words, the combination can sometimes be established for a netcredit - the investor receives cash for establishing the position. Theinvestor keeps the cash credit, regardless of the price of theunderlying stock when the options expire.

Until the investoreither exercises his put and sells the underlying stock, or is assignedan exercise notice on the written call and is obligated to sell hisstock, all rights of stock ownership are retained. See both ProtectivePut and Covered Call strategies presented in this section of the site.



Risk vs. Reward
This example assumes an accrued profit from the investor’s underlyingshares at the time the call and put positions are established, and thatthis unrealized profit is being protected on the downside by the longput.

Therefore,discussion of maximum loss does not apply. Rather, in evaluating profitand/or loss below, bear in mind the underlying stock’s purchase price(or cost basis). Compare that to the net price received at expirationon the downside from exercising the put and selling the underlyingshares, or the net sale price of the stock on the upside if assigned onthe written call option.

Upside Call Example
This example also assumes that whenthe combined position is established, both the written call andpurchased put are out-of-the-money.

• Net Upside Stock Sale Price if Assigned on the Written Call = Call’s Strike Price + Net Credit Received for Combination
  

                                      
                                         OR

• Net Upside Stock Sale Price if Assigned on the Written Call = Call’s Strike Price - Net Debit Paid for Combination

Downside Put Example
This example also assumes that whenthe combined position is established, both the written call andpurchased put are out-of-the-money.

• Net Downside Stock Sale Price if Exercising the Long Put =Put’s Strike Price + Net Credit Received for Combination
  

                                        OR

• Net Downside Stock Sale Price if Exercising the Long Put = Put’s Strike Price - Net Debit Paid for Combination

Continued In "Conclusion"...

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