Options Collar Management - 3 Adjustments To Consider

To be able to succeed with collar, you need to know how to manage it. In other words, what do you do after you have it on. There are 3 scenarios that could happen after your collar trade is live:

One, for some reason, the stock just falls asleep and stays where it is for the entire the life of the puts and calls insurance. You end up losing your insurance premium because put expires worthless and so does call. Your position now includes only naked stocks. Either place another put-call combination for the current month to replace the expired, or sell the stocks to liquidate the whole position.

Two, stock crashes hard below the put strike. You should just let it crash and not panic because you have your insurance in place. However, if stock falls around 20 to 25%, consider rolling your put-call pairs down. What this means is sell the put and buy back the call and place another same pairs but on lower strikes (where the stock falls to).

If you don't do this, when the stock starts to recover you won't make any money. Stocks falls hard and fast is the best you can expect for this type of trade. Unless it is because of a horrific news like Lehman Brother blowing-up, you get to make a whole lot more money when it starts to move up again.

Last, if stock moves up pass the call strike, you will make near your max reward. It is not actually the max reward unless it is the last day of the options' life. But if you don't do anything and it continues to move up, you will not make any more reasonable money.

What should be done is rolling the insurance up. You could use the current options month but I don't recommend anything less than 14 days. 45 days is a little bit long but it is better to use in that case. Make sure you follow the 10% rule for the distance between two strikes (distance between the put and call is 10% of the stock price) and the third rule for the short call to long put premium (the premium collected from the call is at least one-third of the cost to purchase the put).

Happy Trading.

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