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Options trading is full of interesting names and terms, but don't let that fool you. The right options strategy can in fact save you headaches – and make you lots of money.
Take, for instance, a collar options strategy. The options collar is a strategy to protect gains in a stock that has already had a nice move higher. It is better than selling the stock to lock in your profits, because you still get to participate if the stock moves up a little more.
And it is better than just buying a protective put, because it is usually much cheaper.
Here's how it this options trading strategy works.
Let's say you own a stock with a nice paper profit but don't want to cash it in just yet. Maybe you think it can move a bit higher. Or perhaps you know a fat dividend is coming up and you want to get it without risking your capital gains.
What you do is buy a put option with a strike price at or just below the stock's price. And at the same time, you sell a call option with a strike price at or just above the stock's price.
Basically, you "collared" the stock with an option above and below. Put another way, you bought a protective put and partially paid for it by selling a covered call. And depending on the specifics of each option, it is possible to pay for the whole put with the call. In other words, the net cost to you could be zero.
Of course, there is no free lunch. In exchange for protecting you from losses should the stock price fall, a collar will cap the amount of additional profit you can earn, should the stock price rise even further.
Many investors are sitting on gains but are worried that a major correction is just a tweet away. Why not get a little insurance to protect your winnings?
Money Morning's options trading specialist, Tom Gentile, has a simple options collar you can run right now based on a stock many investors already have in their portfolios.