Protective collar options strategy

More video on topic «Protective collar options strategy»

Start with the fundamentals of Equity Options including basic terminology, characteristics and concepts of equity options.

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The call strike sets an upper limit on stock gains. The investor should be prepared to relinquish the shares if the stock rallies above the call strike.

Don't Forget Your Protective Collar - Investopedia

The LEAPS strategies area includes worksheets on Buying Equity LEAPS Calls, Buying Equity LEAPS Puts, Buying Equity LEAPS Calls as a Stock Alternative, Buying Index LEAPS Calls, Buying Index LEAPS Puts, Buying Index LEAPS Bull Call spreads.

At $98, the call writer would have had incurred a paper loss of $555 for holding the 655 shares of XYZ but because of the JUL 95 protective put, he is able to sell his shares for $9555 instead of $9855. Thus, his net loss is limited to only $755 ($9555 minus $9755 original investment).

Conversely, a decrease in implied volatility will be doubly painful because it will work against both options you bought. If you run this strategy, you can really get hurt by a volatility crunch.

An option spread is established by buying or selling various combinations of calls and puts, at different strike prices and/or different expiration dates on the same underlying security. There are many possibilities of spreads, but they can be classified based on a few parameters.

Note, however, that the stock price can move in such a way that a volatility change would affect one price more than the other.

A long strangle gives you the right to sell the stock at strike price A and the right to buy the stock at strike price B.

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Assume that the long call is in-the-money and that the short call is roughly at-the-money. Exercise (stock purchase) is certain, but assignment (stock sale) isn't. If the investor guesses wrong, the new position on Monday will be wrong, too. Say, assignment is expected but fails to occur the investor will unexpectedly be long the stock on the following Monday, subject to an adverse move in the stock over the weekend. Now assume the investor bet against assignment and sold the stock in the market instead come Monday, if assignment occurred, the investor has sold the same shares twice for a net short stock position, and is exposed to a rally in the stock price.

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