Options Trading Strategies: Collar
Collar is a three-legged strategy where the you buy, or already own the underlying security, buy one OTM put and sell one OTM call, both with the same expiration date.
The collar strategy is similar to the OTM covered call strategy, with the addition of an OTM long put to hedge against the drop in the underlying asset price.
When to use this strategy?
You own BTC/ETH, and looking for a low risk, longstanding trade. Also, the collar is a low risk strategy to use if you are already using the covered call as an income strategy, but you want to be protected from an unpredicted price drop of the underlying asset.
Below is a Profit and Loss chart example of a collar options strategy:
Pros:
Provides a very good protection against a fall in the underlying price. You can create a very low risk or even risk-free trade, by experimenting with the strike prices.
Cons:
Capped maximum profit, and also a small reward relative to the capital you have spent to create the position.
Example:
In this example, BTC is trading at 43,542.30 USD. You have bought a BTC at 43,429.00 USD, bought an OTMput with a strike price of 43,000.00 USD, and sold an OTM call for a strike price of 44,000.00 USD both with an expiration date of March 4th 2022. You have received a premium of 2.58 USD, however this is a net debit strategy because you payed for the BTC so you will have the expensive initial costs.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is at or below the OTM long put strike price the maximum loss is realized, and it is equal to the initial cost minus the strike of the put.
If the BTC price is at or above the OTM short call strike price, the call is exercised and the maximum profit is achieved, and it is equal to the short call strike minus the initial cost.
You are in the profit as long as the BTC price is above the break even price.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 43,000.00 (strike price LP) | -426.42 (max loss) |
| 43,088.00 | -338.42 |
| 43,219.00 | -207.42 |
| 43,732.00 | -54.42 |
| 43,426.42 (break even) | 0 |
| 43,506.00 | +79.58 |
| 43,709.00 | +282.58 |
| 43,898.00 | +471.58 |
| 44,000.00 (strike price SC) | +573.58 (max gain) |