http://www.theoptionsinsider.com/tradingtechnology/?id=904 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. Enjoy... 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: http://www.theoptionsinsider.com/tradingtechnology/?id=904
Collar is strategy to follow if you already have the stock. Note that synthetically it is a vertical call. check this: http://mediaserver.thinkorswim.com/transcripts/collars.pdf Also, search for Slingshot collar strategy by RiskDoctor or check this: http://www.riskdoctor.com/Downloads/OTTHRChapter9LITE.pdf In a regular you give up or limit the upside in order to finance the cost of the insrance (Put).