trading options using the collar strategy allows
for a limited but continued capital appreciation of a long stock
position while providing for a limited, fixed downside exposure.
The position is very inexpensive to initiate when trading options,
due to the offsetting premiums of the long (purchased) put and
short (sold) call.
The collar is an excellent protective strategy when trading
options for an investor who has a bullish opinion on a stock.
In looking at the bullish lean example, one of the flaws is
the fact that if you move that upside call to the higher strikes
you may overly decrease the amount of premium you receive for
the sale of that call which, as you know, is supposed to compensate
for the amount spent on your protective put.
One way to adjust for this when you are trading options
look further out across the months in the strike you are interested
in. Selling a call out two or three months may generate enough
premiums to fully offset the price of the put.
Remember, premiums increase over time for all options. You do
not have to be confined by the idea that your long put and short
call have to be in the same expiration month.
This adjustment provides more acceptable premium balance when
trading options. This allows extra room for a strong upward
stock move while still giving you maximum downside protection.