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Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Strip
Strap
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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The Collar

Risk: limited
Reward: limited

General Description
Entering a collar, or protective collar, entails buying a lower strike put and selling a higher strike call on a stock already owned. Essentially, a collar is a covered call with a protective put.

(draw a collar risk diagram here)

The Thinking
You're long a stock and wish to remain long. You sell out-of-the-money calls to generate cash flow (covered calls), and to protect yourself from a move down, you buy out-of-the-money puts. Ideally the underlying trades flat or slightly up. As long as the stock closes below the call strike, you maintain ownership of the stock and keep the call premium, but you'll probably lose the put premium (semi expensive insurance). You won't make much with this strategy, but periodic 3% gains add up if you're playing with big numbers. It's like getting a monthly or quarterly dividend.

Example

You've been the proud owner of 1000 shares of XYZ for several years. It's a quiet stock which has treated you well. You'd like to use covered calls to generate a little cash flow but also want some downside protection just in case the stock drops a bunch. The stock is at $43. You sell (10) 45 calls (covered calls) for $1.50 each and then buy (10) 40 puts for $0.75 for downside protection.

If the stock rallies to $45, the calls will expire worthless, and you'll profit $1.50 per contract, and the puts will also expire worthless, and you'll lose $0.75 per contract. The net of this is a profit of $0.75 per contract, and you would still own the stock which is now up 2 bucks from the time the trade was initiated.

Above $45, you’ll still make $0.75 per contract, but the stock will get “called” from you. That is unless you don't exit the option trade.

If the stock drops to $40, the calls expire worthless, and you'll profit $1.50 per contract, and the puts will have will also expire worthless, and you'll lose $0.75 per contract. The net of this is a profit of $0.75 per contract, and you would still own the stock which is now down 3 bucks from the time the trade was initiated.

Below $40, your P&L will be the same because the loss from the stock will be countered by a gain from the long puts leg.

The PL chart below graphically shows where this trade will be profitable and at a loss.