Option Investor
Educational Article

Options Create the Best-Dressed Stock Trade

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For the purposes of this article, the collar consists of two options positions that ring a long stock position. A sold call with a strike above the current stock price provides much or all of the credit used to purchase a long put position with a strike just below the current stock price. Because of the peculiarities of options pricing, it's sometimes possible to buy a put that is only slightly out of the money for the credit received from an out-of-the-money call. If a stock should decline, the sold call expires worthless while the put partially offsets the loss in the stock price.

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