The Collar

While reading an article this past weekend that was highlighting the benefits of using an Option Collar, I happened to be watching a show that had a scene with horses. It then dawned on me that it was worth a look at the definition of a “horse collar” — this is what I found (courtesy of Wikipedia):

The part I liked above was “… use its full strength when pulling …”. It seems that an Option Collar has some similarities worth noting:

  • allows a position to run, full strength with some boundaries (capped gain is one).
  • collar is an improvement over a stop because a Gap down/up can be painful.
  • collar improves work effort in that your mental capital can be directed to other trades, less worry about a trade that is collared up (just let it run).

Here are a few examples of current trades where a Collar is doing its job for me:

  • $DVA is a Fab 5 member that has a September 105/100 Collar on. The 100 Put is currently ITM (in the money) and is lessening the impact of the stock drift back under the $100 level.
  • $LULU is a swing position where I am long the stock with a September 75/72.5 Collar on the position. Price is currently above the short 75 Call strike so the gain is currently capped.
  • $FB is a long-term account position where I am short the stock with a September 18/19 Bear Collar. I have bought back the short 18 Put today and remain long the 19 Call (ITM) — which lessens the impact of the bounce occurring this week.

 

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