Stocks & Commodities V. 26:4 (65): Explore Your Options by Tom Gentile
Product Description
Explore Your Options by Tom Gentile
THE COLLAR VS. THE BULL CALL SPREAD
I know that owning shares of stock and a put option are equivalent to simply holding a call option. If so, then the collar should represent the equivalent of the bull call spread. Since collars require so much more capital, why do many investors prefer the collar over the bull call spread? Wouldn’t it be better to use a bull call spread and then get the interest from a money market account?
Great question. You are absolutely correct that buying shares and a put is the synthetic equivalent of owning a long call. If you buy 100 shares of stock and one put option, the risk and reward from the position is going to be the same as buying one call option. Both will feel the same impact from time decay, both have limited risk and limited reward, and both will generate profits from a move higher in the stock price.
THE COLLAR VS. THE BULL CALL SPREAD
I know that owning shares of stock and a put option are equivalent to simply holding a call option. If so, then the collar should represent the equivalent of the bull call spread. Since collars require so much more capital, why do many investors prefer the collar over the bull call spread? Wouldn’t it be better to use a bull call spread and then get the interest from a money market account?
Great question. You are absolutely correct that buying shares and a put is the synthetic equivalent of owning a long call. If you buy 100 shares of stock and one put option, the risk and reward from the position is going to be the same as buying one call option. Both will feel the same impact from time decay, both have limited risk and limited reward, and both will generate profits from a move higher in the stock price.
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