Collar Option Strategy

What are the characteristics of this option strategy?

The collar option strategy is a very popular strategy especially amongst those who have a medium to long-term outlook when trading in the markets. The risk of this strategy is medium as it limits losses but also limits gains to a certain extent. The goal of this strategy is to reduce the cost of a long position in an underlying asset.

Is this a bullish, bearish or neutral strategy?

The collar option strategy can be used for both bearish and bullish options trades. For example, if an investor is bearish on an underlying asset, they can use a collar option strategy to reduce the cost of a short position. Similarly, if an investor is bullish on an underlying asset, they can use a collar option strategy to reduce the cost of a long position.

Is this a beginner or an advanced option strategy?

The collar option strategy is considered to be an intermediate to advanced option trading strategy. It involves the combination of a covered call and a protective put which can be difficult for an inexperienced trader to execute.

In what situation will I use this strategy?

The collar option strategy is typically used by traders who want to protect their downside risk while also limiting their upside potential. It is a good strategy for those who are bullish or bearish on an underlying asset and want to reduce their risk exposure.

Where does this strategy typically fall in the range of risk-reward and probability of profit?

The collar option strategy typically falls on the lower end of the risk-reward and probability of profit spectrum. It is a relatively low risk, low reward strategy as it limits gains and losses to a certain extent.

How is this strategy affected by the greeks?

The greeks will affect this strategy to a certain extent. The collar option strategy involves a combination of a covered call and a protective put, and the value of these trades will be affected by the greeks such as delta, gamma, theta and vega.

In what volatility regime (i.e VIX level) would this strategy be optimal?

This strategy would be optimal in a low to medium volatility regime. The goal of this strategy is to reduce the cost of a long or short position, and so a low volatility environment would be ideal for this strategy.

How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?

Adjusting the collar option strategy when the trade goes against you can be relatively easy or difficult, depending on the situation. If you have a protective put in place, then this can help give you downside protection regardless of where the market goes. If the market moves the wrong way, then the adjustment should be done by either closing out the covered call or buying a further out of the money put option to replace the one that you have.

Where does this strategy typically fall in the range of commissions and fees?

The collar option strategy typically falls on the lower end of the range of commissions and fees due to the limited risk exposure. The cost of the strategy will vary depending on broker commissions and option premiums, but typically it will be much lower than other option strategies.

Is this a good option income strategy?

Yes, this can be a good option income strategy. By selling the covered call, the investor can generate additional returns on a long position. This can be very useful if the underlying asset is not expected to go up significantly.

How do I know when to exit this strategy?

The collar option strategy should be exited when the underlying asset reaches the strike price of the covered call or the protective put. If the strike price is reached and the market is expected to remain at this level, then the trade should be exited. Otherwise it could be beneficial to remain in the trade as long as possible as the premiums of the options could still be beneficial.

How will market makers respond to this trade being opened?

Market makers are likely to be neutral to this trade being opened. They may try to extract additional premium from the investor by charging higher prices for the option trades, but typically the impact of this will be minimal.

What is an example (with calculations) of this strategy?

An example of the collar option strategy would be an investor buying 100 shares of a company at a price of $50 and then writing a covered call with a strike price of $55 and buying a protective put with a strike price of $45. The total cost would be the price of the stocks plus the cost of the the call and put options. If the stock remains between $45 and $55, then the investor will benefit from the option premiums paid when the options expire.

Conclusion

The collar option strategy provides investors with the flexibility to limit their upside potential as well as their downside risk. It is a good strategy for investors with a medium to long-term outlook on the markets and can be used for both bullish and bearish trades. For investors looking for an efficient way to protect their downside risk, then the collar option strategy is definitely worth considering.

MarketXLS provides tools to help traders analyze and compare options strategies. With its powerful options chain scanning tools and customizable options strategies, MarketXLS can help traders identify opportunities and develop strategies to suit their individual objectives.

Here are some templates that you can use to create your own models

Collar Option Strategy
Delta Neutral Hedging
STOCK REPLACEMENT

Search for all Templates here: https://marketxls.com/templates/

Relevant blogs that you can read to learn more about the topic

Collar Option Strategy – A Synopsis
Collar Option Strategy – A Synopsis
“Maximizing Your Profits with Out of Money Call Options”
Unlock the Potential Profits of Collars Trading
Maximizing Returns with Covered Put Options