Trading Option Collars

Adam Warner

Images used with permission of TD Ameritrade IP Company, Inc., who reserve all rights.

Collars have achieved some degree of popularity in recent years. Investors generally use them in a simple fashion. They own a stock. Stock rallies. They want to lock in some gain but still participate in more upside. So they slap on a simple collar.

A basic collar involves buying a modestly out-of-the money (OTM) put and shorting a modestly OTM call in the same numbers, with quantities equal to the stock the investor already owns (one of each option for every 100 shares held long and one of each call per 100 shares). The options are opened at prices so that the premium received on the call equals or exceeds that paid for the ...