Zero Cost Collar

"A collar is an option strategy that limits the range of possible positive or negative returns on an underlying to a specific range." In other words, a collar will protect an investment against drastic downside movement by sacrificing some gains from a drastic upside movement.

A collar consists of 3 positions:

• A long underlying
• A long OTM Put (called the "floor")
• A short OTM Call (called the "cap")

By collecting more for the short call than it costs for the long put, the collar costs you nothing, and can even bring in a credit.

Suppose you owned 100 shares of TSLA, with a cost basis of $120. You believe in TSLA and are very bullish long-term. Now, suppose that TSLA is trading over $140 and you'd like to protect yourself in case the price drops.

Above, with the price at $141.35, you can see that your position is currently up $2135. BE for your position is 120 and any price below that will result in a loss if you sold out. At 130 you'd still be up $1000, at 150 you'd be up $3000, and at 160 you'd be up $4000.

You can create a collar by shorting the 160 call and buying the 120 put. Now, if TSLA falls below 120, you wouldn't lose anything. In fact, you would still be ahead $42, since that's the credit you collected for the collar. The profit at the other price points (130, 150 and 160) is also $42 more than the stock position alone. Remember, It's important that you don't let an ITM put get assigned, unless you want to sell your stock. It's also important to remember that is TSLA were to drop in price quickly, the value of your short put would become inflated, making it more profitable to close early.

This protection comes at a cost; your upside potential is capped at the 160 price point. So, as long as you feel that TSLA won't close above 160 by Jan expiration then it doesn't cost anything. Remember, if TSLA climbs above 160, you don't have to let the call get exercised and be forced to sell your stock. Wait until closer to expiration when the extrinsic value of the call goes away and buy it back. This cost then gets added to your cost basis for the stock.

Above, you can see what happens if we tighten the collar. By lowering the short call and raising the long put, two things happen. First, you lock in over $1000 if TSLA were to tank. However, you don't get something for nothing. Your maximum potential profit is reduced by $1000. Still, there's a potential of $3000.