Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management

Chapter 13. The Collar: Sleep at Night

I have worked the markets for decades as both a trader and an investor. As a professional trader, I stepped onto the floor eager for volatility. Then, trends changed quickly, spreads between bid and ask prices were wide, and orders flowed into the pit driven by irrational decision making and fear. In those days of low costs for trading and rapid changes in position, traders loved markets with volatile price changes because those kinds of markets made collecting profits easy for a savvy trader.

As a typical personal investor, however, I loathe volatility. Investors need to work through brokers and other professionals, adding costly commissions to trades. Investors generally can't access market data as quickly as traders, and they often don't have large amounts of cash available to gamble on short-term profits with small margins. As an investor, the game often feels rigged; I was constantly playing the fool.

The goal of this book is to help investors learn how to use options trading to an advantage. Personal investors must balance theoretical knowledge about derivatives against the practical need to manage risk, and they must protect savings and investments against unnecessary loss when market values for stocks begin to swing wildly up and down. One options strategy often used to control risk is the collar strategy.

Collar Strategy

As an investor, you probably seek to build up a varied portfolio of stocks, bonds, cash instruments, and other investments ...