Collar
A hedging strategy: hold the underlying, buy a protective put, and sell a call to reduce hedge cost.
Why it’s used
- Protect downside while capping upside
- Reduce hedge cost vs buying a put alone
- Useful when you want to stay invested but reduce drawdown risk
Tip
A collar is a risk management tool. Optimize strikes based on how much protection you want vs upside you are willing to give up.
Practical deep‑dive
Info
Profile
Best suited for neutral or income/hedging objectives depending on structure.
Strategy snapshot (quick)
| Field | Value |
|---|---|
| Style | hedge |
| Cost type | Often used as a hedge/insurance (premium is the “insurance cost”). |
| Best when | You want downside protection while staying invested (risk management). |
| Watch out | Premium cost can add up; choose strikes/expiry based on protection needed. |
Greeks to watch
Focus on these exposures first
| Greek | Why it matters |
|---|---|
| Delta | How much protection you get for a move |
| Theta | Insurance cost over time |
| Vega | Hedges often get pricier when fear rises |
Professional options traders focus on “structure first”: define risk, choose strikes/liquidity, and write down exit rules before entry. Most losses come from oversized positions and holding short-dated options without a plan.
Execution checklist
Use this before placing the trade
| Check | Why it matters | Quick test |
|---|---|---|
| Liquidity | Spreads can eat edge | Tight bid‑ask + decent volume/OI |
| Risk defined | Prevents blow-ups | Max loss is known and acceptable |
| Time horizon | Avoid time mismatch | Expiry matches your view timeframe |
| Volatility regime | Premium cost changes outcomes | IV not extreme vs recent range |
| Exit plan | Stops emotional decisions | Target/stop/time exit written down |
Mistakes to avoid
- Trading illiquid strikes (wide spreads) because premium looks “cheap”.
- Using market orders during fast moves and getting poor fills.
- Adding to losing positions without a predefined rule.
- Ignoring event risk (results, policy events) near expiry.
- Overusing weekly expiries before mastering risk control.
Summary (takeaways)
- Prefer defined-risk structures while learning.
- Liquidity and execution quality matter as much as strategy selection.
- Consistency comes from process, not predictions.