Costless Collar Option Strategy
What are the characteristics of this option strategy?
The costless collar options strategy combines both a protective put and an uncovered call. By combining these two options, it is possible to create an options hedge that is costless or with a net credit. This hedge permits the investor to protect themselves from downside risk, while remaining exposed to upside profit potential.
The costless collar is considered an intermediate strategy for investors who have at least some experience with options trading. It is a limited risk, limited reward strategy that places a cap on the maximum profits, while limiting the losses as well.
Is this a bullish, bearish or neutral strategy?
The costless collar is a neutral strategy. It can be used to protect a long position in the underlying asset – either a single stock or an ETF – while maintaining exposure to potential upside gains.
Is this a beginner or an advanced option strategy?
The costless collar is best suited for intermediate to advanced options traders. It is important to understand the basics of options trading in order to successfully implement this strategy without taking on too much risk or missing out on potential profits.
In what situation will I use this strategy?
The costless collar can be used for a variety of different situations, but is especially useful for traders who hold a long position and are looking to limit downside risk while still maintaining upside potential. This is especially useful in volatile markets, where there is the potential for a large downside move and a limiting of upside due to the protective put options.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The risk-reward for the costless collar is limited. A trader’s maximum potential profit is the credit taken in when the strategy is established, while the maximum potential loss is limited to the current market price. The likelihood of success with this strategy is moderate, as it relies on market volatility to remain at relatively stable levels, while market prices remain within a limited range.
How is this strategy affected by the greeks?
The costless collar is affected by all of the commonly used option greeks. Delta is of particular importance, as the delta of both the protective put and the uncovered call will affect the level of risk exposure. The gamma and vega will also have an impact, as these determine how quickly the hedge moves when market prices and volatility levels change.
In what volatility regime (i.e VIX level) would this strategy be optimal?
This strategy typically works best when volatility levels are relatively low. This is because when volatility is high, the extrinsic value (time value) of the options increases substantially. This makes it more difficult to create a net credit when the strategy is established, thus making it more difficult for the strategy to be profitable.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting the costless collar when the trade is going against you can be quite challenging and it is important to understand how the different options affect the risk exposure and volatility. If the market begins to move in the opposite direction of the expected direction or the price of the underlying asset falls, it may be necessary to roll the original option positions to better align with the new market conditions.
Where does this strategy typically fall in the range of commissions and fees?
As with any options trading strategy, the cost of commissions and fees can add up quickly. However, due to the fact that the costless collar is a net credit strategy, the effect of commissions and fees is minimal. This strategy can be conducted with a very low cost of commissions, making it a popular option for both beginners and experienced traders.
Is this a good option income strategy?
The costless collar is primarily a hedging strategy, so it is not typically used as an income strategy. However, if the underlying asset remains relatively stable, then it is possible to receive a consistent income stream from the protective put options while still maintaining upside exposure.
How do I know when to exit this strategy?
When deciding when to exit the costless collar strategy, it is important to consider the current market conditions and the outlook for the underlying asset. If the market is volatile and the outlook for the asset is uncertain, then it may be best to exit the strategy and close the protective put options to protect against further losses. On the other hand, if the market is stable and the outlook for the asset is positive, then it may be best to exit the strategy and close the uncovered call options to receive the maximum potential gains.
How will market makers respond to this trade being opened?
Market makers will likely be neutral regarding the costless collar strategy. They are likely to view the strategy as a hedging tool and will not hold any particular bias.
What is an example (with calculations) of this strategy?
Here’s an example of a Costless Collar strategy using the stock MSFT whose current price is $285 by buying a protective put and selling an uncovered call:
Assuming that we own 100 shares of MSFT and we want to implement a Costless Collar strategy with the following options:
Buy 1 MSFT put option with a strike price of $275 for a premium of $3.50
Sell 1 MSFT call option with a strike price of $295 for a premium of $3.50
The net cost of buying the put would be $350 ($3.50 x 100 shares), which is the maximum potential loss for the strategy. However, by selling the call, we receive a premium of $350 ($3.50 x 100 shares), which offsets the cost of the put and makes the overall cost of the strategy zero.
If the stock price of MSFT falls below the strike price of the put option ($275), the put option provides protection against further downside risk. If the stock price of MSFT rises above the strike price of the call option ($295), we may be obligated to sell our shares at the strike price of the call option, which limits our potential upside.
How MarketXLS can Help
MarketXLS is an Excel add-in that helps investors analyze, research and model options. With MarketXLS, you’ll be able to model various options strategies, such as the costless collar strategy, with ease and accuracy. You’ll be able to analyze the potential risks and rewards of the strategy, making it easier to make informed decisions. MarketXLS also provides data on commissions and fees, making it easier to compare the costs of different strategies. In summary, MarketXLS provides a comprehensive and powerful suite of tools to make options trading easier and more profitable.
Here are some templates that you can use to create your own models
Search for all Templates here: https://marketxls.com/templates/