for either the call (strike plus net debit) or the put (strike minus net debit) - 101.00 and.00, respectively. For example, think of earnings announcements with good news; but, generally, these events are low probability. Well, the 110 put costs.75 and the 105 put costs.15. Tradeoffs: A risk reveral is a great way to play a hopeful big move up in a stock. Therefore, the comparison assumes the equivalent 100 shares in the comparison stock-only position. However, its a fairly significant move from stock trading. Buying and selling Puts will constitute bearish diagonal spread. Therefore, lets look at the risk plot of the MAR 115 call / 105 PUT collar: Risk Graph DIS MAR 115 call / 105 PUT Collar: The Tradeoffs: This type of strategy looks to take off as much risk as possible from the stock.
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In this instance, the intrinsic value of the in-the-money option will offset the losses incurred from the out-of-the-money option, resulting in a net gain. . Since we took in.80 credit for selling the call, we dont have enough money from the call to purchase the 110 put for.75 and therefore would have to pay.95 for the protection. Nothing bawdy to see here all you are accomplishing is writing a put in exchange for the premium, or the credit to your account from selling the put. Strategy #2 Collared Stock Put Protection Bought with Call Premium. This is great when markets are high and you feel that youve missed the run. In this strategy we start with a covered call from the example above but instead of taking the premium from the sale of the call to reduce the positions cost basis (read, putting cash in your pocket you take the proceeds from the sale. I think of options as an investment where there will be an equal number of winning and losing positions. Unless the price of the underlying stock or ETF falls below the exercise price, the put will expire worthless. With options, we dont have to trade a direction, that is, we dont have to choose if a stock or ETF will increase or decrease in value. Straight stock, in the following risk graph we will compare the risk reduction across the three strategies introduced so far.