Time For Collars?

By Lawrence G. McMillan

With the stock market at all-time highs, and many stock holders sitting on large gains, thoughts often turn to options as a hedging technique. For stock owners, there are two ways to provide protection to a portfolio: 1) macro protection, which involves the use of index options to hedge a entire portfolio’s risk, or 2) micro protection, which involves the use of individual options on each stock in the portfolio. In either case, the use of a collar is often attractive to the owner of the portfolio, because it is often established for zero debit.

However, whenever one hedges a portfolio – or anything, for that matter – he must give up something in the process. If he eliminates downside risk, he likely relinquishes some upside profit potential, for example. That is certainly the case with collars.

In this article, though, we’re going to look at a type of collar which might allow one to “have his cake and eat it too.” That is, the downside will be protected, but there will still be upside profit potential. We have addressed the topic of collars in many past issues.

Read the full article (published on 11/28/14) and get all of the trading recommendations by subscribing to The Option Strategist Newsletter today. Introductory 3 month trial subscriptions are available for only $29.