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Trade Of The Week: Stock with Collar

July 22, 2020

Trade Of The Week: Stock with Collar

You would enter this trade when you expect the share price will rise but you are concerned of a possible fall below the strike price A. Your objective is to protect the capital value of your shares as you have the right to sell your shares at any time at the strike price A. You pay for this protection by selling the Call at B. Depending on the strike prices you choose this could be done for zero cost or even a net credit.

You would enter this trade when you expect the share price will rise but you are concerned of a possible fall below the strike price A. Your objective is to protect the capital value of your shares as you have the right to sell your shares at any time at the strike price A. You pay for this protection by selling the Call at B. Depending on the strike prices you choose this could be done for zero cost or even a net credit.

By doing this, you forego the chance of exceptional gains to prevent potentially exceptional losses. 

If you already own the stock, you can just buy the put at strike price A, and sell the call at strike price B.

You will reach a maximum profit at strike price B, where the profit will be equal to:

Gain on shares + Net premium from the options trades.

You will reach a maximum loss at strike price A, where the loss will be equal to:

Loss on shares – Net premium from the options trades.

A tweak to this strategy would be to buy long dated puts and sell short dated calls over the life of the strategy to generate extra premium. This extra premium is generated from the faster rate at which short dated calls experience time decay.

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform.

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795.

 

Past returns do not reflect future returns. 

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au first. 

 


General Advice Warning

Any advice provided by Reach Markets including on its website and by its representatives is general advice only and does not consider your objectives, financial situation or needs, and you should consider whether it is appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

Please click here to read our full warning.

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