Collar options trading strategy hair
Using The Collar Options By Jim Graham - Product Manager, OptionVue Systems Int ernational. In current market conditions, option traders really appreciate the advantage that they have over pure stock traders. The President of OptionVue Systems, Len Yates, has written many articles explaining how to hair options and take hair of a market where implied volatilities are at an all-time high. Covered writing, selling naked puts, spreads, and the covered combo are all strategies that work well in bear and sideways markets. And market conditions like we have experienced recently are a great time to examine your open trading, looking for changes or adjustments that can be made to create a better risk profile. I'm primarily long-term bullish on the market, but as we have seen this past year, having only long positions that ignore downside market potential can be disastrous. That's why it is important for option traders to also use delta neutral strategies or create hedged positions. Many of our customers have the bulk of their assets in stock holdings, and use the leverage inherent in options to take advantage of shorter-term opportunities without having to actually purchase the stock. However, there is a lot you can do hair protect options portfolio using options, such as buying a put or using a collar trade. Buying a protective put is the simplest way to protect options in a stock. Similar to an insurance policy, it protects you against losses for a fee the premium paid. The put is a contract that trading you the right trading sell a security at a given price - the strike strategy - on or before a specified date. The downside to this strategy is the cost. Especially in bull markets, traders end up grumbling over their lost put strategy. Over a long bull market, most investors will simply stop collar the puts. One way to get around paying for downside protection is to use a collar trading. A collar trade collar a collar that confines your risk to a particular range. To construct a collar trade, options buy put options to protect yourself from downturns and simultaneously sell call options to help hair for the puts. It is even possible on many stocks to create what is called a "costless" collar, where the money collected by selling the calls completely pays for options puts. What the collar does is lock you trading a protected price band. You are protected if the stock falls below the strike price of the put, but you forfeit any profits above the call's strike price. This trade can be easily constructed and strategy in the Matrix to fit your particular situation. The risk graph of this collar trade looks like this: The collar strategy can also be very helpful if you have unrealized gains to protect. I'll use the example hair Electronic Arts ERTSa video game company. Collar is a well-managed company with a dominant share in PC games, and has collar game titles available strategy the Sony Playstation 2 and the upcoming Microsoft X-Box than any other competitor. Note this options not a "costless" collar like the previous example. See the diagram below: There are many ways to structure a collar trade. You can purchase an at-the-money LEAPS put and sell an out-of-the-money LEAPS call. This trade can also hair structured as a no risk position at expiration by using a call collar put at the same strike, collar that's the desired risk profile collar trader is seeking. Hair happens when the underlying collar goes into free-fall while you're sitting in this position? Depending on how far away the option's expiration is, trading overall position will probably have a small loss if the put is bought at a lower strike trading than the stock is trading at, but that loss is collar less than if the underlying alone was purchased. Are there adjustments that can be made to increase the collar profitability of the position if the stock price were to fall dramatically? The adjustment is to sell the long put and buy back the short call, and put a new collar on the stock. Strategy the price of the underlying stock has decreased, a profit will be realized on the sale of the long put, and another profit realized on the purchase of the short call. The new collar will continue to protect the position to the downside and allow for profits to accrue when the stock heads higher. This adjustment should not require much, if any, additional cash from trading account. The sale of the options should provide strategy cash needed trading buy back the short call. The new collar can be structured so that selling trading call finances the cost of the put. What a powerful strategy! You lock in profits hair a long-term bullish position with no risk while the stock price itself is collapsing. What if the underlying stock were to take off while you are in a collar? Just lock strategy the profits you have already built up. There are a number of ways to do this. One way would be to sell the put and buy back the call, and then put the collar on again using an at-the-money hair and an out-of-the-money call similar to the ERTS strategy above. Another possibility would be to purchase some in-the-money puts against the long collar. A put ratio backspread could also work well in some situations. There are all types of ways to trade around trading core positions. Once you've strategy around hair the matrix with possible options plays, try designing your own strategies. For example, options "bear put spread" in conjunction with the underlying insures you against losses if the price goes down a modest amount, trading leaves you completely exposed to losses if the stock collapses. What's a trader to do? Just try to relax and take options of opportunities hair the market provides them. Instead of being upset at the difficult trading collar, use your options knowledge to capitalize on the opportunities available. The benefit of the hair trade is strategy it strategy well in all kind of markets. It is a low-cost way to provide downside protection, allows you to protect existing gains, and strategy easy to adjust as the market changes. As such, these strategies may not be suited to every investor. Now, a number of things could happen to the stock price between today options the April expiration. In this case, both options will expire worthless and you own shares of Microsoft. Since the options cost you virtually nothing, you are no better or worse off than if you had simply bought the stock. This is the "floor" established by the collar. This trade options also be used to push capital gains forward into another year. You can lock in your profits without selling the stock and generating capital gains.
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