The stock market has been on fire recently! Many investors are sitting on equity highs in their stock trading portfolios. While I am super bullish right now on the stock market, the truth is, no one really knows what the future holds.
This is why taking defensive measures to protect your gains can be prudent as stocks keep hitting all time highs.
One powerful option trading strategy to protect your profits is known as a Collar.
Just what is a Collar? Specifically, It is buying one put and selling one call option at the same strike price per 100 shares of the stock that you want to protect. The stock option strategy is ideally designed so that the premium received for the call option sale will offset or even completely cover the price of the put option.
In the perfect textbook situation, a net credit will be produced when using the Collar stock option strategy. The call sale confines the upside while the put purchase insures the downside. Put in everyday terms, this approach “collars” your losses in substitute for restraining the upside exposure.
This tactic is best if you are sitting on firm gains in a stock but don’t quite yet want to seize profits. Using stock options like this enables you to be exposed to extra upside while helping moderate downside risk. However, be advised that additional gains are also limited. This means that should the stock explode on the upside, the Collar option trading strategy will also prevent you from profiting.
Source: http://tradingtips.com/daily/options-trading/options-can-protect-profits/
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