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Dynamic Collars

A collar is an options trading strategy that is constructed by holding shares of the underlying stock while simultaneously buying protective puts and selling call options against that holding.  Technically, the collar strategy is the equivalent of a out-of-the-money covered call strategy with the purchase of an additional protective put.

The collar is a good strategy to use if the options trader is writing covered calls to earn premiums but wish to protect himself from an unexpected sharp drop in the price of the underlying security.  At Watts Gwilliam we use our proven IPOM model to manage the calls while maintaining the put position for downside protection.  

Typical clients of the dynamic collar strategy include:

  • Clients looking to protect some of their existing equity allocation.
  • Clients willing to give up some upside in order to have the downside contractually protected.
  • Clients concerned with the interest rate risk inherent in bond investing.
  • Clients concerned about a short-term pullback in the stock market.
  • Businesses or real estate investors looking for somewhere to place short-term excess cash holdings.

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