| Like other strategies, the collar can be | | | | line loss of the stock's capital result. This |
| leaned toward the investor's perception of | | | | means that before you make any money from the |
| the stock's direction and strength. | | | | position, the stock must trade up $ .65. |
| | | | |
| Let's look at the potential leans that can be | | | | If the stock stays stagnant you will lose $ |
| taken. Say that you have a very strong | | | | .65, and any capital loss you incur will be $ |
| feeling the XYZ is going to go up. Instead of | | | | .65 worse. Now back to the position in our |
| buying a put and selling a call with strikes | | | | previous example. With the selling of the |
| that are roughly equidistant from the stock | | | | Dec. 30 call, we had an upside potential of |
| price, you would sell a call that is further | | | | $1.50. In this example things change. |
| out-of-the-money. | | | | |
| | | | As was stated, our maximum upside potential |
| This would allow more room for a larger | | | | is calculated by setting the stock price at |
| increase in stock price because the stock | | | | the strike price of the short call which is |
| would not be called away as early. You retain | | | | 32.5 in this case. With the stock at $32.50 |
| ownership for a longer period of time during | | | | at expiration, you would have a $4.00 stock |
| the increasing price period. | | | | gain since the stock was purchased for |
| | | | $28.50. |
| Of course, by increasing the distance of the | | | | |
| option's strike away from the stock, the | | | | Remembering your $0.65 debit to enter the |
| amount of the call's premium will decrease. | | | | position, we subtract that from the $4.00 and |
| The overall effect is that you'll have to pay | | | | we have a total maximum profit of $3.35. |
| more to own the position. (You will pay out | | | | This is significantly more potential reward |
| more money for the put than you will receive | | | | than our original example using the Dec. 30 |
| from the call.) | | | | call. |
| | | | |
| Again, we'll start with the same prices as in | | | | As in all trading situations that offer a |
| our original case, (stock $28.00, Dec. 27.5 | | | | higher potential reward, there comes a higher |
| put $1.00 and Dec. 30 call $1.00) only now we | | | | potential risk. If the stock stays at $28.50, |
| will change the Dec. 30 call at $1.00 to the | | | | (the stagnant scenario) you have a loss of |
| Dec. 32.5 call at $ .35. | | | | $.65 in option costs. In the down 'scenario,' |
| | | | calculating the maximum risk is done by |
| In our other examples, we incurred no debit | | | | setting the stock price at $27.50 on |
| or credit from our option position. This | | | | expiration. |
| time, with the bullish lean, a debit is | | | | |
| incurred. The purchase of the Dec. 27.5 put | | | | The stock, purchased at $28.50 has lost |
| for $1.00 combined with the receipt of $ .35 | | | | $1.00. The options, not neutral, resulted in |
| from the sale of the Dec. 32.5 call produces | | | | a $.65 loss. The total loss is $1.65. In both |
| a $ .65 debit. | | | | the 'stagnant' and 'down' scenarios, the loss |
| | | | increased over that in our original example. |
| Remember, this debit must be subtracted from | | | | As you can see, the higher potential gain is |
| the bottom line profit or added to the bottom | | | | accompanied by an increased potential risk. |