Pros and Cons of Collar Options
- CollarOptions
- Jan 10, 2024
- 2 min read
There are many ways to play a bullish, bearish, or neutral stock. Just because this site is mostly on collar options, does not mean it is the best strategy in every case. Here are some pros and cons to consider with collar options:
Pros:
You are able to manage your risk by selecting the put strike based on your stock purchase price (reduce it further by selling a call option). The further out of the money (OTM) puts will be cheaper but will likely increase the risk amount. In some cases, the entire risk could be eliminated (typically with further out option expirations).
It is possible to adjust your position if the options go in the money (either to the upside or the downside). You will almost always have the ability to roll out the strikes or leave your options in place and have the shares be taken or called away. In either case, it is always necessary to keep track of your cost basis. Your platform may or may not correctly calculate it for you.
If you happen to pick a stock that pays dividends, then you will collect on those dividends depending on how long you hold the position. This will be a nice way to collect some income while waiting for the position to play out.
Cons:
The collar options strategy will use up quite a bit of capital to setup because you will need to buy 100 shares of a stock. An alternative to using individual stocks is to use an etf that could have a smaller price tag. It will not necessarily perform in the same manner, but the return might be reasonable. Another possibility is to use an ITM (in the money) leap options. Although this will be cheaper, you will not collect any dividends along the way.
Another con is that the fact that the upside potential is capped (assuming no adjustments are made). You will not gain anything extra if the stock price goes beyond the call strike that was sold. The total gain will be based on the difference between the call strike and the cost basis of the stock (including the cost of the put option).
Be sure to choose a strategy that works for your own particular goal and risk tolerance. The positives from this strategy does help lessen some anxiety of losing capital in the stock market.
