SPY Collar

Using a collar option strategy on SPY is a great way to have market exposure while reducing risk and still collect some dividends. This approach works perhaps more nicely in a downtrend and can allow you to have a much better cost basis.

For example, you could have bought SPY on Friday (1/5/24) near the closing price of 467.92 followed by buying the June 28th 468 strike put option and selling the June 28th 483 strike call option for around $0.01 in credit which translates to $1.00 of actual credit (0.01 x 100 shares).

The cost basis for this trade actually improves by 0.01 because we are collecting a credit, 467.92-0.01=467.91. Now here's the amazing part, because the put strike is above our cost basis, there is no downside risk. In fact, if the market drops further, the position could be held until expiration for a net gain of $9 (put strike of 468-cost basis of 467.91=0.09 or $9).

The upside potential is capped however because of the 483 call strike that was sold. The max gain will be 483-467.91=15.09 or $1509. This assumes the position is held until expiration and/or the shares get called away.

If the market continues higher, then some adjustments could be made to keep the shares. Credit spreads could also be sold to further reduce the cost basis. While we wait for the market to do its thing, we may collect some dividends also :)