The Collar Strategy is a covered call writing-like strategy where a protective put is added to the trade, thereby establishing a floor and a ceiling with a maximum gain and a maximum loss. The 3 legs of a collar are an out-of-the-money (OTM) call, an OTM put and a long stock position. This article will use a real-life example with NVDIA Corp. (Nasdaq: NVDA) to demonstrate how to calculate the initial collar returns using the BCI TMC spreadsheet.

Main uses for adding a protective put to convert covered call trades to collar trades

• Protection in a contract period to protect during an earnings report
• Protection during bear & volatile market conditions
• Reducing risk during uncertain times (Brexit, Fed announcement, elections etc.)
• Protecting appreciated stocks
• Insurance when we can’t be near a computer to monitor portfolios

Real-life example with NVDA

• 11/17/2024: Buy 100 x NVDA at $132.67
• 11/17/2024: STO 1 x OTM 12/17/2024 $134.00 call at $5.30 (ceiling)
• 11/17/2024: BTO 1 OTM 12/17/2024 $128.00 put at $3.45 (floor)

NVDA option-chain on 11/27/2024 for the 12/27/2024 expiration

NVDA call returns only: Before protective put purchase

• The entire call premium is entered
• If taken through expiration, this is a 31-day trade (red circle)
• The breakeven price is $127.37 (yellow cell)
• The initial covered call return is 3.99%, 47.04% annualized (brown cells)
• An additional 1% can be realized if the share value moves up to or beyond the $134.00 strike (purple cell)

 

NVDA Collar Calculations Deducting the Put Debit from the Call Credit ($5.30 – $3.45)

• The net option premium is entered ($5.30 – $3.45 = $1.85)
• If taken through expiration, this is a 31-day trade (red circle)
• The initial covered call return is 1.3%, 16.42% annualized (brown cells)
• An additional 1% can be realized if share value moves up to or beyond the $134.00 strike (purple cell)

NVDA Collar Pros & Cons

• Advantages

–Protects against catastrophic share loss below the $128.00 protective put strike

–Still results in a net option credit with an insurance policy

–Upside potential remains the same (1%)

–Sleep better at night?

• Disadvantages

–Initial time-value return is reduced from 3.99%, 47.04% annualized to 1.39%, 16.42% annualized

Discussion

• The collar strategy adds a protective put to our covered call trades
• Protects us against overwhelming share price decline
• Time-value returns will be lower in exchange for the added protection
• Our collar trades can be managed by the BCI Trade Management Calculator (TMC)
• We do so, by deducting the put premium debit from the call premium credit
• We can establish both initial and final calculations using this spreadsheet

 

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The purpose of this book is to give the reader the tools to master a conservative stock and option strategy with the goals of generating monthly cash flow and focusing in on capital preservation. Selling cash-secured puts is a low-risk strategy that leverages high-quality stocks and exchange-traded funds to accomplish these objectives.

This book will present basic option principles that apply to this system and will walk you through the process of stock and option selection. Additionally, calculating profits and position management will also be critical topics addressed. In other words, every aspect of this strategy will be discussed including the necessary steps to take before, during and after a trade is executed. Examples of real-life trade executions will be shown in conjunction with illustrative charts and graphs, and the rationale for each step behind the trade will be explained using easy-to-understand terminology.

Click here to learn more.

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