Collar Trades

[mrmarkfraser]

I am just curious about Collar trades. What situation would make it  a profitable trade. Any thoughts, ideas, or experiences would be appreciated, thanks

[Edwin]

I usually would use collar trades to hedge against long stock, typically if I am holding shares through earnings or an event.  I typically do it for a credit, so I would be selling a call for more than what the put I am buying costs, so if the stock doesn't move much, the p&l would likely be flat or up a little, depending on the entry on the stock.  

 

More info: http://www.theoptionsguide.com/the-collar-strategy.aspx

[Yowster]

I agree with ebdoc, I view a collar as a good tool to use around earnings events when you have a large stock position in a volatile stock.  I think they only make sense to protect a long position you already own, not as something to use by itself. The classic example is selling an OTM call and using the proceeds to buy an OTM put for roughly the same cost - so you cap your upside gains in exchange for some downside protection.  I haven't done a lot of these, but when I have its been a slightly modified version where I'll sell an OTM upside call and then buy a downside put spread that has the long leg just slightly OTM - the tradeoff here is that the downside protection kicks in right away, but is also capped.