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What is a collar option strategy?

A collar option strategy limits risk beyond the protective put’s strike. Even if a stock price goes to zero, the trader’s loss maxes out at the protective put’s strike. Another way to protect your stock position is to implement a protective put. With a protective put, a trader buys a put in addition to their long position in the underlying stock.

What is the difference between collar options and covered call options?

In contrast, the covered call option generates income by allowing another investor to buy the underlying asset at a fixed price. The collar options strategy suits investors willing to sacrifice potential gains to limit their downside risk and generate additional income.

What is a collar strategy payoff diagram?

The collar strategy payoff diagram has a defined maximum profit and loss. Shares of the underlying asset may be sold at the short call strike price or the long put strike price if the option is in-the-money at expiration. If the stock is between the two levels at expiration, both the call and put options will expire worthless.

What are the tax considerations in a collar strategy?

There are at least three tax considerations in the collar strategy, (1) the timing of the protective put purchase, (2) the strike price of the call, and (3) the time to expiration of the call. Each of these can affect the holding period of the stock for tax purposes. As a result, the tax rate on the profit or loss from the stock might be affected.

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