What About a Collar?

Today the markets have been acting crazy.  Stocks will be up huge one day and down huge the next.  In general they are not doing very much.

That is what makes covered calls such a great idea.  When you buy a stock and sell a call you make an income from selling the calls and you do not need the stock to do anything.  But remember we still are in a bears market.  Stocks could suddenly crash without warning tomorrow.

Selling a $.50 call isn’t going to be very helpful if the stock falls 10 points.  So what about a collar?  Collar spreads allow you to make money selling covered calls and help protect you from the downside at the same time.

Here’s how it works.  Say you buy a stock for $90 and sell the $90 call on it for $7.  With a covered call this is all you need; you just hope that the stock will not fall by an extreme amount before your call expires. 

But because this is a collar we also buy the $85 put for say $5.  Now we are protected from a significant drop in the stock price and stand to gain money if the price goes up, or sideways.

Here is what could happen.

1.       The stock could go up, in which case we would be called out for a profit of $2 ($7 - $5). 

2.       The stock could stay between $85 and $90, in which case the options would expire and we walk away with the stock.

3.       The stock could fall significantly and we would be able to sell it at $85, it would be a loss, but not as big as it would be if we did not buy the put.

This strategy is a conservative way to pull out money from your investments in the stock market.

For more information about the collar spread visit http://www.stocks-simplified.com/collar_option.html