top of page
Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Strategy
Beginner, Advanced, Hedging
Collar
Protective strategy: buy put (protection against decline) + write call (cost reduction). Suitable for stock holders.
Detail
A collar is a conservative options strategy that combines the purchase of a put option (protection against a downside) and the writing of a call option (to secure income and reduce the cost of the put). This creates a price range in which the position is protected against a downside while limiting the profit on an upside. A collar is ideal for investors who want to protect a stock against a large decline but don't mind a limited profit.
Collar is used to hedge the shares held. Put option protects against falling below the specified strike, call option yields a premium, but limits the profit if the shares exceed the strike call. Collar thus creates barriers – maximum loss (to put) and maximum profit (to call). If chosen correctly, it can be “zero-cost”, i.e. without initial cost.
Optimal conditions
The need to protect held shares against a decline, anticipation of a possible market decline. Also suitable before results.
Max profit
Limited — the rise in the stock price to the strike price of the written call.
Max loss
Limited — a drop in the stock price to the strike price of the purchased put.
Risks
Limited profit if the stock rises sharply.
Greeks
Delta by stock, put protection reduces Delta, Theta dependent on option parameters, Vega by options.
Variations
Zero-Cost Collar (call and put premiums are equal), Protective Collar (more expensive, better protection).
Usage example
We hold XYZ stock at $100. We buy a put strike 90 (protection) and write a call strike 110 (profit limit). The stock is protected against falling below 90, profit is limited to 110.
DTE
Short-term (30-60 days) or long-term (LEAPS) depending on the need for protection.
IV (implied volatility)
A lower IV will allow you to buy a policy cheaper, but will result in a lower credit on the call statement.
Premium
Ideally Zero-Cost (balanced call write and put buy).
Margin
It is not required if the stock covers a written call.
Notes
One of the most conservative strategies for portfolio protection. Excellent during market uncertainty.
Tags
collar, stock protection, hedging, call write, put purchase, option, hedging, downside protection, zero-cost collar
bottom of page