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Editor's Note: Options are a great way to "insure" your portfolio against sudden price drops. With Tom's strategy, you can make markets pay for that "insurance," cutting your risk even more. Here's Tom…
We've looked before at two ways to make money when interest rates go up. One strategy offers the potential for unlimited gains, while the second gets you pricey, quality shares with a fraction of the risk.
These are both really powerful moneymakers, especially in a rising rate environment.
Now here's the thing – you can take both of these trades, combine them, and get rock-solid protection against just about anything that would hurt share prices.
You get open upside on the stock, too.
Traders call this a "collar," and it's as powerful to use as it is easy…
This Is a Really Potent Protective "Cocktail"
To make this trade, you combine covered call options on a stock you already own with an at- or out-of-the-money put on the same stock.
Like so:
Now, here's where the "collar" comes in.
A collar trade is formed when you already own the stock and buy at-the-money or slightly out-of-the-money puts while selling slightly out-of-the-money call options at the same time on the same order ticket.
Both the put and call options must have the same expiration month and must have the same number of contracts.
This is ideal to use when you want to significantly lower your risk against falling prices but are still "conservatively bullish." And the best part is that you shouldn't need to exit the trade early because there's very little risk – in some cases, zero.
It's easy, but it's versatile, too. There are a couple of different scenarios when it's to your advantage to make this trade.
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About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.