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Collar Option Trading Strategy-Bullish Strategy

Bull-Call-Spread-Option-Strategy

Collar Option Trading Strategy-Bullish Options Trading Strategies

Collar Strategy is an extension of Covered Call Strategy. An investor/trader who is optimistic on the market but has low risk tendencies and wants to reduce risk, he will use the Collar Strategies. Collar entails purchasing an underlying stock/index (either cash or through futures), purchasing an at-the-money put option, and selling an out-of-the-money call option with the same expiry date. If the bullish window turns out as expected, the long position in the underlying will profit, but the rising profit scenario on the option contract will be confined to the short call. If the market goes in the opposing way, the long-Put option will cover losses.

Risk

Long puts and long underlying restrict risk on both the downside and the upside.

Reward

In the case of a bullish situation, the gain is confined to the short call option.

Construction

Buy underlying security in Cash or Futures Market

Buy 1 OTM Put Option

Sell 1 OTM Call option

long collar

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 29/03/2023 17500.0 45.95 Sell 1
PUT 29/03/2023 17050.0 151.1 Buy 1
FUTURES 29/03/2023 -NA- 17150 Buy 1

 

Max Risk Max Reward Lower Break Even Upper Break Even
17036.852 312.0492 17187.951 17187.951

 

Market Expiry Payoff 1 Payoff 2 Payoff 3 Net Premium Option PayOffAt Expiry
16650.0 0.0 400.0 -487.2 -105.15 -192.35
16700.0 0.0 350.0 -437.2 -105.15 -192.35
16750.0 0.0 300.0 -387.2 -105.15 -192.35
16800.0 0.0 250.0 -337.2 -105.15 -192.35
16850.0 0.0 200.0 -287.2 -105.15 -192.35
16900.0 0.0 150.0 -237.2 -105.15 -192.35
16950.0 0.0 100.0 -187.2 -105.15 -192.35
17000.0 0.0 50.0 -137.2 -105.15 -192.35
17050.0 0.0 0.0 -87.2 -105.15 -192.35
17100.0 0.0 0.0 -37.2 -105.15 -142.35
17150.0 0.0 0.0 12.8 -105.15 -92.35
17200.0 0.0 0.0 62.8 -105.15 -42.35
17250.0 0.0 0.0 112.8 -105.15 7.65
17300.0 0.0 0.0 162.8 -105.15 57.65
17350.0 0.0 0.0 212.8 -105.15 107.65
17400.0 0.0 0.0 262.8 -105.15 157.65
17450.0 0.0 0.0 312.8 -105.15 207.65

 

Collar Option Trading Example

Trader is optimistic on the NIFTY index and anticipates it to rise further, but the trader is too cautious. He used the Collar option strategies, in which he goes long on  one NIFTY futures contract at 17150, short one 17500 out of the money Call Option for premium of Rs. 45, and goes long on one 17050 at the money Put Option for Rs. 150.

Scenario 1:

If the NIFTY expires below the long-put option contract at 16900 on the expiration date, the investor will lose on the long futures contract and short call but profit on the long put contract equivalent to

Net loss = Loss on index position + profit from long put option and Net premium paid for options contract

Rs. 15375 = {(-17150 +16900) + (17050-16900) + (-150 + 45} *75.

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Scenario 2:

At expiry if NIFTY closes at 17050, then the trader will make a loss of

Net loss = Loss on index position + no profit/loss from put option and Net premium paid for options contract

Rs.15375. [(-17150+17050) + (-150+45) *75]

Scenario 3:

At expiry if NIFTY closes at 17450, above the long futures but below the short call strike, then the trader will make a profit of

Net profit = Profit on index position + Net premium paid for options contract

Rs. 14625 = {(17450 - 17150) + (-150+45)} *75]

A trader can have a different view from consensus view and wish to execute different option strategies, Traderadar provide all season option trading strategies for free, for all its clients.

Also read: Bull Call Spread Option Strategy

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