Collars

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 9, No. 13 on July 13, 2000. 

Most option traders – even fairly novice ones – understand that options can be used to protect a stock holding against loss. However, when one delves into the specifics of establishing such protection, he usually forsakes the protection, often due to apparently high costs. In this article, we’re going to re-visit a subject that we’ve discussed before (protection), but try to bring some facts to light that might not be understood by many stock owners. The reason that we think this might be an apropos topic now is that it’s July, and July has marked a peak for the market in each of the last two years. There is some evidence (page 5) that a similar scenario might be unfolding again this year.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 23, No. 22 on December 1, 2014. 

With the stock market at all-time highs, and many stock holders sitting on large gains, thoughts often turn to options as a hedging technique. For stock owners, there are two ways to provide protection to a portfolio: 1) macro protection, which involves the use of index options to hedge an entire portfolio’s risk, or 2) micro protection, which involves the use of individual options on each stock in the portfolio. In either case, the use of a collar is often attractive to the owner of the portfolio, because it is often established for zero debit.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 3, No. 23 on December 8, 1994. 

We have written a few articles about collars this year, but another one is appropriate because it is a strategy that can give one peace of mind in a market like this.

To review, a collar consists of long stock, a long out-ofthe- money put, and a short out-of-the-money call. The resulting position has limited risk, because of the ownership of the put. It also has limited profit potential, because of the presence of the short call. In general, investors don’t like to pay a lot of cash out of pocket for the put/call combo that sits on top of the stock. In fact, a “no-cost collar” is one in which the price of the call is equal to or greater than the price of the put when the position is established.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 17, No. 13 on July 11, 2008. 

The decision to set up a hedge to protect one’s stock portfolio is never an easy one. When times are good and stocks are rising, investors are loathe to spend the money required to hedge their positions. When times are bad, and the market is dropping, the cost of hedging increases. However, that fact is usually understood by investors, who might not mind paying a little more for insurance once it is obvious that stocks are no longer rising, in general. However, another impediment to hedging usually surfaces at that time: an investor fears that he has waited too long, and thus doesn’t want to buy insurance right at the bottom of the market’s decline.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 19, No. 15 on August 13, 2010. 

When one hedges risk in his portfolio – whether via broad-based index option strategies or via individual stock options – that doesn’t necessarily end the discussion. Later, especially if the underlying declines sharply in price, one has decisions to make. In this article, we’ll discuss those decisions as they apply to the somewhat popular strategy of “collaring” stock.

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 4, No. 22 on November 30, 1995.

Using options to protect your portfolio is, for most people, more of a theoretical exercise than a practical application. By that, I mean that most people think about using puts to protect their stocks — and they might even look at a few prices in the newspaper and figure out how much it would cost to hedge themselves — but when it comes right down to it, most people consider the put cost too expensive and therefore don't bother buying the protection.