You first determine how much you think the market will go up, sell the corresponding Call, then see how close a put you get for the money you got? Or you first measure your risk tolerance, buy the put, and sell a Call option worth the same? Any other tips fro improving Collars?
The best collar is the one you never have. When the market stops going up, close the position. OTOH, if you insist on collaring, figure out the various R/R each position and select the one that you're most comfortable with. Keep in mind that a collar is equiv to a vertical so you collar at a later date. Spread from the outset.
There's no proper or inproper way of setting up collars. It depends on your preference and the current option pricing.
Collars are a nice conservative strategy. They cap your upside but limit your downside, all for free! I would say to put a collar on when you want to own a stock but are worried about a future negative catalyst that could hammar the stock. Collars are better than puts at times because they are free or less expensive, and don't get devalued by time decay. I would not put a collar on an explosive stock, such as a volitle high beta stock like aig, because if the stock goes on a run you will miss out on a ton of gains. You can put on a collar anytime you want, really it just depends on your preference. A lot of collars are hedges, not speculation. They are there to pretect gains. If you own a stock and it makes a huge run over several months, you may want to sell to protect gains but you don't want to pick a top. You think the stock may have further to go, but are unsure. Instead of buying a put to lock in gains, which is costly and has time decay, you can implement a cost free collar. Investors use this option strategy a lot. It is really more of a stock play then an option play, because if the collar is cost-free then you don't have to worry about the greeks a whole lot.
Maybe sell the collar for a credit, so if the stock just bounces around you make some money. A. If your bullish hold the stock b. if your bearish, sell or short the stock c. if you are uncertain, do a collar until you get to A or B If you are just a conservative guy/gal, just take a smaller position in the stock. Tom
What if something unexpected happens (like 9/11) and you don't have enough time to close your position (sell) fast enough? What if the market actually opens sharply lower?
Why do a collar in the first place? Why not do a debit call spread? It's synthetically the same and requires a hell of a lot less cash up front? 4Q