Creating a Low Cost Collar

      When an investor gets to a point where they have substantial gains in a position they may want to start to look at protection against loss. One of the most creative low cost ways to achieve this is through an options play known as a collar trade. The trade consists of buying a put option and financing the cost of that put option with a call in the same month on a higher strike. The call option may also be sold in one of the next several months out depending on the on several factors A) Implied Volatility between the given months will normally dictate the call month to be sold B) the differential IP in the several strikes in question C) the amount of time there is leading up to expiration.

      The collar can be versed out of or taken prior to expiration should the trader want, as well as either part of the collar may be traded out of by selling out of the put or buying the call in. If either part of the collar is in the money at expiration, the stock will be called away, though the buyer has the choice of not exercising the right to sell the stock by choosing not to exercise the put at expiration, the short call has an obligation to deliver the shares upon assignment. Should the stock close at any price between the strikes the exercise is not automatic and the owner should retain the shares.