What is a Collar Option Strategy and When to Use Them

What is a Collar Option Strategy and When to Use Them

Posted On November 19, 2019 12:57 pm

Stocks keep grinding to new highs but there’s an uneasy feeling we might get a year end shake out.

On the macro front, trade talks with China still appear to be unresolved. In addition, Home Depot (HD) and Kohl’s (KSS) reported disappointing earnings, sending their shares down 7% and 15% respectively. Of more concern is whether these reports represent a canary in the coal mine, as consumer spending has been the solid bedrock on which the economy and the stock market has been built over the past few months.  

That leaves us in a bit of a conundrum, and investors don’t know whether to buy or sell.  Many are wishing they could call a timeout, in order to step back and assess the situation heading into the end of the year (especially when one recalls last year’s November/December decimation of the stock market).

Last week I discussed how one could essentially put your stock position on hold, using an option strategy known as  a collar. I received a number of emails asking for an expanded explanation, so here we go.

A collar, which is also known as a conversion, is the simultaneous purchase of a put and sale of a call, with both having the same strike and expiration. This can be done in conjunction with…

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.