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Chapter 5. Two Popular Strategies and Ho... > The Collar (or Protected Buy-Write)

The Collar (or Protected Buy-Write)

The Collar is designed to produce an extremely low risk strategy where, in certain cases, the trader can even enjoy a virtually riskless trade.[6] It may sound too good to be true, but it is possible—although I recommend that you enter in two separate orders for buying the stock and trading the calls and puts. Floor traders do not like the idea of you successfully executing a trade like this, even if the potential returns aren’t spectacular.

[6] The risk-free position generally only applies to the position at expiration.

For the strategy to work in this way, it needs to be a long-term strategy, with the options expiring at least one year out, that is, Long-term Equity AnticiPation Securities (LEAPs®). LEAPs are basically long-term expiration options.[7]

[7] Equity LEAPs are long-dated options on common stock or ADRs of companies that are listed on securities exchanges or trade over-the-counter. Equity LEAPs expire in approximately two to three years from the date of initial listing; equity LEAPs roll into the standard option after the May, June or July expiration depending upon whether the standard option associated with the LEAP is on the January, February, or March expiration cycle.


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