Protective Collar Strategy - forms a collar to limit the downside - making money for risk averse investors.
You want to make money in the stock market but you are a risk-averse investor; and don’t want to expose yourself to the potential of losing all of your money! Well, there’s a strategy for you which I will cover in this article.
If you want to make money in the Options market; but are afraid because of the associated downside associated with it; you can use the Protective Collar Strategy; it can provide protection against short-term losses, allowing you to make money when the market goes up.
Let’s say there’s a Stock X
Current Market Price (CMP): $180
Premium for 1-month $182 call = $0.60
Premium for 1-month $176 put = $0.40
Protective Collar Strategy provides investors an opportunity to make money in the market when the market goes up; and at the same time protects them from huge losses in case of a fall in the stock price. Therefore, it’s a good strategy for risk averse investors who want to make money safely.
The downside of this strategy is that along with limiting the maximum loss; it also limits the maximum profit for an investor in case of a bullish market. So, it creates a collar or a boundary within which the investor can make a profit or a loss.
Do check out MKJ sir’s video on this topic at this link!
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Thanks for giving us this strategy , will use it whenever we feel apprehensive about impending markets fall/crash.
How to choose correct strike levels for call and put trades in protective collar strategy ?
There is no rule of thumb for choosing the correct strike prices; it depends on market conditions and varies from stock to stock. Would recommend you to follow MKJ sir's YouTube channel to stay updated on different companies' stock prices and trend patterns.
Link: https://www.youtube.com/c/ManojkumarJain
Thank you very much giving us a nice strategy but it require more money to invest. Is this strategy use full for equity shares..?
Yes, this can be applied in equity shares. But please take care that trading is a risky business and I would only recommend you to invest that amount of money which you can afford to lose. Thanks for reading! :)
Example to be explained as per lot size of stock.. will be easier to understand.
Sure, will consider that :)
Those doing options and then using this strategy, I doesn't make sense.
Options is not for risk averse players.
They should simply be away
You're correct. In fact, a 100% risk averse person may not even feel safe about keeping his money in a bank's savings account (after the recent developments in the Indian Banking System - Yes Bank, PMC Bank, etc.).
But, nothing is so black and white, and everyone's risk acceptance criteria is different. There are people who want to enter into options trading but want to start with one of the safer strategies within that. I sincerely hope this article was able to help some of those people. :)
Thanks for your input!