How To Hedge Using Collars

Discussion in 'Options' started by archon, Jul 2, 2008.

  1. archon


    Came across this the other day and it seemed pretty relevant given the current market conditions. A lot of people are probably looking for ways to hedge and protect their stock portfolios these days. This article lays out three ways to do it:

    A "no-cost" collar

    A "bearish" collar

    and a "diagonal" collar.


    How To Hedge Your Stock Positions Using Collars

    Posted on 7/1/2008 in Trading & Technology by Lawrence D. Cavanagh

    It is well known that you can hedge a stock by either buying a put or by writing a call on it. What is not so well known is that you can combine these two strategies. This long stock + short call + long put combination is known as a "collar."

    As we shall show you with four different variants, this combination is really very flexible. In a coming report, we will show you the advantages and disadvantages of a different hedge, the 1-to-1 bear spread.

    Hedging With A "Collar"
    Usually, when setting up a collar (long stock + short call + long put), you write a near-the-money call on stock that you own and buy an out-of-the-money (i.e. lower strike) put on this same stock. On a net basis, if the call strike price is closer to the stock price than put strike price, you will take in premium....

    full article here:
  2. nice article. thanks.