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
| 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.
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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