This article was originally published in The Option Strategist Newsletter Volume 3, No. 23 on December 8, 1994.
We have written a few articles about collars this year, but another one is appropriate because it is a strategy that can give one peace of mind in a market like this.
To review, a collar consists of long stock, a long out-ofthe- money put, and a short out-of-the-money call. The resulting position has limited risk, because of the ownership of the put. It also has limited profit potential, because of the presence of the short call. In general, investors don’t like to pay a lot of cash out of pocket for the put/call combo that sits on top of the stock. In fact, a “no-cost collar” is one in which the price of the call is equal to or greater than the price of the put when the position is established.