Collar

In order to protect a stock, investors and traders use the collar. The collar, also known as cylinder strategy or fence strategy, is like insurance for stocks. You can create a collar by using call and protective puts at the same time and when the position of the stock is long. The profit potential for this strategy is the same as with the bull spread. The profit is limited to the strike price of the short call. The loss is limited because of the long put.

For example, you bought 100 shares of ABC at $ 25.68 in May. You then want to protect your stock from any downward movement without spending so much. What you can do then is creating a collar by buying July 10 put at $1.20 and then selling one July 15 call at $1.60.

The long stock will gain as the price of the stock increases and will lose if the price drops. This is the same as in other long positions. However, you will reach maximum profit when then stocks reaches $30. Above that, the profit then is offset by the loss on the call option. Conversely, your maximum loss will be when the stock reaches below $20. Below that, the profit is offset by the loss you will have from the stock.

This strategy is used by investors who want a conservative strategy with good return and risk, as well as tax benefit. The right way to do this strategy is to find a put and call that creates profit while still protecting the stock from any downward movement. Many investor use this every month and lock in at 3-5% profit. By rolling, you purchase the short calls and then sell new calls at different strike prices the following month. You can do the same with the puts. You will therefore have to adjust the collar accordingly. For the tax advantage, it is best to talk to your accountant to take full advantage of this strategy.