Like other strategies, the collar can be leaned toward the investor's
perception of a corporate stock options direction and strength.
Lets look at the potential leans that can be taken. Say that
you have a very strong feeling the XYZ is going to go up. Instead
of buying a put and selling a call with strikes that are roughly
equidistant from the corporate stock options price, you would
sell a call that is further out-of-the-money.
This would allow more room for a larger increase in the corporate
stock options price because the stock would not be called away
as early. You retain ownership for a longer period of time during
the increasing price period.
Of course, by increasing the distance of the options strike
away from the corporate stock options
, the amount of the call's
premium will decrease. The overall effect is that youll have
to pay more to own the position. (You will pay out more money
for the put than you will receive from the call.)
Again, we'll start with the same prices as in our original case,
(stock $28.00, Dec. 27.5 put $1.00 and Dec. 30 call $1.00) only
now we will change the Dec. 30 call at $1.00 to the Dec. 32.5
call at $ .35.
In our other examples, we incurred no debit or credit from our
option position. This time, with the bullish lean, a debit is
incurred. The purchase of the Dec. 27.5 put for $1.00 combined
with the receipt of $ .35 from the sale of the Dec. 32.5 call
produces a $ .65 debit.
Remember, this debit must be subtracted from the bottom line
profit or added to the bottom line loss of the corporate stock
options capital result. This means that before you make any
money from the position, the corporate stock options must trade
up $ .65.
If the corporate stock options stay stagnant you will lose $
.65, and any capital loss you incur will be $ .65 worse. Now
back to the position in our previous example. With the selling
of the Dec. 30 call, we had an upside potential of $1.50. In
this example things change.
As was stated, our maximum upside potential is calculated by
setting the corporate stock options price at the strike price
of the short call which is 32.5 in this case. With the corporate
stock options at $32.50 at expiration, you would have a $4.00
stock gain since the corporate stock options were purchased
Remembering your $ .65 debit to enter the position, we subtract
that from the $4.00 and we have a total maximum profit of $3.35.
This is significantly more potential reward than our original
example using the Dec. 30 call.
As in all trading situations that offer a higher potential reward,
there comes a higher potential risk. If the corporate stock
stay at $28.50, (the stagnant scenario) you have a loss
of $.65 in option costs. In the down scenario, calculating
the maximum risk is done by setting the corporate stock options
price at $27.50 on expiration.
The corporate stock options, purchased at $28.50 has lost $1.00.
The options, not neutral, resulted in a $.65 loss. The total
loss is $1.65. In both the stagnant and down scenarios,
the loss increased over that in our original example. As you
can see, the higher potential gain is accompanied by an increased