Neutral options strategy
Collar
Own the shares, buy a put below and sell a call above. The call pays for the insurance; you give up upside past the call.
NeutralAny IVDefined riskLevel 4 · Selling premium
Collar payoff
An example on a $100 stock with 30% implied volatility. The dashed line is the profit or loss at expiry; the solid line is what the position is worth today.
The trade
Buy 100 shares at $100.00
Buy 1 $94 put · 45 days · $1.62
Sell 1 $109 call · 45 days · $1.39
Net debit $10,023
Max profit$877
Max loss−$623
Break-even$100.23
Chance of profit49%
How it works
- Losses are capped at the put strike, gains at the call strike.
- Choosing strikes so the call premium covers the put is a "zero-cost collar".
When to use it
- You want to protect a big gain in a stock without selling it.
Managing the trade
- Roll the whole collar up as the stock rises to lock in more gain.
Risks
- Shares may be called away if the stock rallies past the call strike.