What is a Collar Option Strategy and When to Use Them
By: Steve Smith
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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