What is a collar option strategy?

A collar option strategy is an options strategy that limits both gains and losses. A collar position is created by holding an underlying stock, buying an out of the money put option, and selling an out of the money call option. Collars may be used when investors want to hedge a long position in the underlying asset from short-term downside risk.

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 happens if you put a collar option on a stock?

That’s because the most you’ll sell that stock for is the value of the covered call strike price. Potential for loss– If you just buy a stock and put a collar option on it, you could still lose money. Sure, your loss is limited by the protective put, but that doesn’t mean you can’t lose anything.

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.