The Collar Option Trading Strategy in Action

Looking for an option play to make? Here’s an article on how to use a collar to profit in the current market. It even suggests four stocks to put a collar on. Make sure you understand the collar and the risk involved in this trade. Always make sure you do your own due diligence before following someone’s advice.

Even after the recent rally treasury yields remain low. Fortunately, volatility has also dropped, affording opportunities to construct treasury-beating option strategies on dividend stocks.

The simultaneous purchase of a stock, writing a call option, and buying a put option creates the option strategy known as a collar. This strategy has limited upside and downside, which if constructed carefully on the right stocks is more attractive than buying a treasury. Several dividend paying natural resource sector stocks were used to construct collars, thereby providing a means to beat Treasury bond payouts. The following criteria were taken into account for comparison with the 10-year treasury:

Higher yield. The options strategy must provide a higher yield than the 10-year treasury on the net initial investment. To this end, stocks were selected which have a higher dividend yield than the 2.23% bond equivalent yield of the 10-year treasury. Stocks were also screened for payout ratios under 0.50 to allow for dividend growth or slack in the event of a downturn.

Better upside potential. The option strategy must allow for more appreciation in the value of the total position than is available to the 10-year treasury. Based on the current rate, a 10-year treasury bond would appreciate 11.7% if its bond equivalent yield dropped to 1%. Thus, the option strategy must allow for a 11.7% appreciation in price.

Better downside protection. The put component of the strategy must…

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