Stocks & Commodities V. 23:9 (34): Explore Your Options by Tom Gentile
Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.
Q: I need help understanding collars. I know you sell the call to finance the put, and the put options act as insurance on your stock. But what happens if your stock
takes off and you are assigned the call? Would you forfeit profits on the stock if it takes a run up? Is there a way around this?
A: As you stated, the collar is a position created with long stock, a short call, and a protective put. By “long stock,” I mean holding shares. It could be a new purchase of stock or an existing position. The collar also includes a put, which will protect the stock from a move to the downside. A long stock, long put position
is sometimes called a “protective put.” One put option is purchased for every 100 shares of stock. However, the collar is different from the protective put because it includes a short call. Selling a call will bring in premium, which helps pay for the put. One call is sold for every 100 shares of stock. So the collar is a low cost
way of protecting a stock position.