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