I read where a vertical collar is an inexpensive way to protect a long equity position from an overnight gap down. Can someone help me understand the construction of a vertical collar. I'm not having much success with my searches.
I tried Google, but the term "vertical collar" is not producing relevant hits. 40 million hits on option+collar. Lots of hits on vertical spreads.
Forget about vertical and just search for collar. The position basically consists of a long stock, short OTM call and long OTM put. For example, you hold 100 shares (current market price 50). You sell short a 55 call, and buy a 45 put.
Iplay, do you understand it yet? If not, I'll explain, but first; do you understand how call and put options work? J
Looks like all you could ever want to know about option collars is now at your disposal. Time to start reading?
The real intent of the exercise of posting here is to locate valid information about a specific type of option + collar called the "vertical collar". Reading about option + collar is worthless for my purpose unless there is an explanation of a vertical collar contained therein. A Google search on "vertical collar" + option will now result in 2 relevant hits, both of which are my forum posts here and on T2W. Remarks that represent rhetoric without meaning are not particularly helpful.
The reason for the word vertical was due to an instructor's usage of the term. I understand puts, calls, spreads and collars, but vertical collar was a new one for me and not in any of my books. A call to the CBOE Institute and help desk produced an answer, but it required the first knowledgeable person consulting with several other knowledgeable people before the term was recognized. It appears to be a very uncommon term. Thanks to those forum members who provided meaningful assistance.
Vertical collar is the same name as bull call spread, which is the sometimes just called a collar. The naming conventions of option strategies are rediculous and simply cause confusion, what matters is the payoff. As Richard Feynman sums up about a particular type of bird; you can know the name in any language, but if you don't know what the bird does, the names are pointless. It's called a collar because you're putting a "collar" on your gains and losses. In the vertical call spread, bull call spread, bullish collar, whatever you want to call it, you sell out of the money calls to help finance the purchase of a put option. This limits your losses (in your situation, a downward gap) and also limits your upside. You also must own the underlying, which in your case could be a stock, future, currency, etc. It's called "inexpensive" because by selling the out-of-the-money call option you receive premium which goes towards buying the put option. If you want further clarification let me know.
Thank you Jgills. A very helpful reply. The folks at CBOE explained the use of the word vertical to mean that the options used in the collar expired on the same date.