Stocks recovered and began hitting new highs again in late September, but some traders fear the market is due for another pullback. Cautious traders stay away from high-flying stocks such as Research in Motion RIMM , Baidu.

A Dynamic Twist on the Collar Trade - iwysuhod.web.fc2.com

AAPL , and Garmin LTD GRMN , but then miss opportunities as those symbols continue higher. How can you possibly have the nerve to enter the market these days? A collar is a conservative low-risk, low-return strategy,because the long put caps risk below its strike price, and the short call reduces any potential upside gains above its strike price.

If both options expire in the same month, a collar trade can minimize risk, allowing you to hold volatile stocks. The following example shows how to modify a collar trade to boost potential profits by selling a call that expires 90 days after the long put. This tactic leaves the underlying position briefly uncovered, but the approach works well if you pick fundamentally strong stocks. To create a standard collar, you could first buy a put that expires in days with a strike that is at-the-money ATM or slightly out-of-the-money OTM.

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The last step is to sell a OTM call in the same month. For example, if you bought a January Table 1 lists the collar trade details, and Figure 1 shows its potential gains and losses at Jan. This collar trade has a return-to-risk ratio of only 1.

One way to adjust a collar is to sell the call days further out in time than the long put, which lets someone else pay for your downside insurance. This unique approach protects the trade as much as a standard collar trade, but it also lets you take part in bullish underlying moves and offers potential returns of percent — roughly four times as large as a standard collar percent.

When you sell the call for a revised collar, try to: At this point, you still must wait for the short call to either move into the money or be assigned.

Focusing on fundamentally solid,volatile stocks. When searching for suitable stocks, you should focus on fairly volatile ones with strong fundamentals. Try to find stocks with the following characteristics: The second key part is volatility, which represents how much the underlying stock moves up or down on a given day. Stock candidates for this modified collar trade should have betas of 1. The answer involves a paradigm shift in how you should view this trade.

Many traders place a stop loss order to control risk, but that is a static way to trade.

Instead of simply entering a collar trade and hoping the market rallies, be ready to adjust it as market conditions change to exploit any trends or lack thereof.

Suppose you entered a revised collar trade on Apple Inc.

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AAPL , which is a fundamentally strong company with quarterly earnings growth of Its return-to-risk ratio is roughly Table 2 lists the revised collar trades components, and Figure 3 shows its potential gains and losses on three dates: Before you place the collar, you should decide when to exit, depending on if Apple rallies, trades sideways, or drops from Oct. However, options that have time value remaining are rarely exercised, so you may have to wait several months.

If Apple rallies strongly, there are a few ways to potentially capture more profits. You could also sell the long put as Apple advances. There are only two scenarios where you truly need a protective long put: If AAPL stagnates and stays flat, the collar trade could run into trouble.

The short call is the only collar component that helps here as it loses value due to time decay. The stock is going nowhere, and the long put loses extrinsic value. You can always sell the long put and then wait for the short call to expire. The short call would still have some time value, but most of it would disappear. Apple just got slammed, and you lost 2. Solid stocks occasionally fall sharply; anyone who watched stocks tumble in August and surge in September understands this.

Build Larger Stock Position with Options Collars - Ticker Tape

A standard options collar trade protects against sharp drops in the underlying in exchange for limited gains on the upside. But this revised collar trade can boost potential profits if you trade it actively and pick stocks with solid fundamentals. The position eliminates your fear of volatility and can change the way you trade. Over time, the revised collar can exploit market downturns and maximize profits as stocks rally.

Home About Did You Know? Home Contact Us Join Now Member Login. Adjusting your Collar Trade by Greg Jensen By Greg Jensen March 17, The Collar Trade is an options strategy that offers low-cost downside protection, but you must give up some potential upside profit. Twisting the Collar Trade One way to adjust a collar is to sell the call days further out in time than the long put, which lets someone else pay for your downside insurance.

Trade example Suppose you entered a revised collar trade on Apple Inc. Managing the Collar Trade Before you place the collar, you should decide when to exit, depending on if Apple rallies, trades sideways, or drops from Oct. The following estimates assume three or four months have passed since entering the collar trade: