18. Collars

The collar trade has particular appeal to conservative investors. The standard version of the collar trade is intended for those who like to hold stocks for the long term, while using options to provide insurance and still allow for a nice return. One reason the collar trade is so attractive is its high level of protection of principal.

During 2008, there were many stocks that investors and analysts believed were good to hold for the long term. Unfortunately, a significant number of those “good stocks” lost 40 percent to 50 percent or even more of their value during that period of time. If those stocks whose price collapsed had been properly collared with options, the loss would have been held to less than 10 percent. And for those ...

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