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Collar Vs Covered Strangle Options Trading Strategy Comparison

Compare Collar and Covered Strangle options trading strategies. Find similarities and differences between Collar and Covered Strangle strategies. Find the best options trading strategy for your trading needs.

Collar Vs Covered Strangle

  Collar Covered Strangle
Collar Logo Covered Strangle Logo
About Strategy A Collar is similar to Covered Call but involves another position of buying a Put Option to cover the fall in the price of the underlying. It involves buying an ATM Put Option & selling an OTM Call Option of the underlying asset. It is a low risk strategy since the Put Option minimizes the downside risk. However, the rewards are also limited and is perfect for conservatively Bullish market view. Suppose you are holding shares of SBI currently trading at Rs 250. You can deploy a collar strategy by selling a Call Option of strike price Rs 300 while at the same time purchasing a Rs 200 strike price Put option. If the price rises to Rs 300, your benefit from increase in value of your holdings and you will lose net premiums. If the price falls... Read More The covered strangle option strategy is a bullish strategy. The strategy is created by owning or buying a stock and selling an OTM Call and OTM Put. It is called covered strangle because the upside risk of the strangle is covered or minimized. The strategy is perfect to use when you are prepared to sell the holding or bought shares at a higher price if the market moves up but would also is ready to buy more shares if the market moves downwards. The profit and in this strategy is unlimited while the risk is only on the downside.
Market View Bullish Bullish
Strategy Level Advance Advance
Options Type Call + Put + Underlying Call + Put + Underlying
Number of Positions 3 3
Risk Profile Limited Limited
Reward Profile Limited Limited
Breakeven Point Price of Features - Call Premium + Put Premium two break-even points

When and how to use Collar and Covered Strangle?

  Collar Covered Strangle
When to use?

The Collar strategy is perfect if you're Bullish for the underlying you're holding but are concerned with risk and want to protect your losses.

A covered strangle strategy can be used when you are bullish on the market but also want to cover any downside risk. You are prepared to sell the shares on profit but are also willing to buy more shares in case the prices fall.

Market View Bullish

When you are of the view that the price of the underlying will move up but also want to protect the downside.

Bullish

The Strategy is perfect to apply when you're bullish on the market and expecting less volatility in the market.

Action
  • Buy Underlying
  • Buy 1 ATM Put Option
  • Sell 1 OTM Call Option

Buy 100 shares + Sell OTM Call +Sell OTM Put

The covered strangle options strategy can be executed by buying 100 shares of a stock while simultaneously selling an OTM Put and Call of the same the stock and similar expiration date.

Breakeven Point Price of Features - Call Premium + Put Premium
two break-even points

There are 2 break-even points in the covered strangle strategy. One is the Upper break even point which is the sum of strike price of the Call option and premium received while the other is the lower break-even point which is the difference strike price of short Put and premium received.

Compare Risks and Rewards (Collar Vs Covered Strangle)

  Collar Covered Strangle
Risks Limited

You will incur maximum losses when price of the underlying is less than the strike price of the Put Option.

Max Loss = Purchase Price of Underlying - Strike Price of Long Put - Net Premium Received

Limited

The risk on this strategy is only on the downside when the price moves below the strike price of the Put option.

Rewards Limited

You will incur maximum profit when price of underlying is greater than the strike price of call option.

Max Profit = Strike Price of Short Call - Purchase Price of Underlying + Net Premium Received

Limited

The maximum profit on this strategy happens when the stock price is above the call price on expiry. The profit is the total of the gain from buying/selling stocks and net premium received on selling options.

Maximum Profit Scenario

Underlying goes up and Call option exercised

You will earn the maximum profit when the price of the stock is above the Call option strike price on expiry. You will be assigned on the Call option, would be able to sell holding shares on profit while retaining the premiums received while selling the options.

Maximum Loss Scenario

Underlying goes down and Put option exercised

The maximum loss would be when the stock price falls drastically and turns worthless. The premiums received while selling the options will compensate for some of the loss.

Pros & Cons or Collar and Covered Strangle

  Collar Covered Strangle
Advantages

It protects the losses on underlying asset.

  • As the strategy involves buying shares when prices fall, there is long-term gain even if their short-term loss.
  • There is no upside risk due to the long position in stocks.
  • Allows you to earn income in a moderately bullish market.
Disadvantage

The profit is limited

  • The substantial risk when the price moves downwards.
  • Risk of assignments.
Simillar Strategies Covered Put Bull, Call Spread, Bull Put Spread Long Strangle, Short Strangle







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