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Collar Vs Short Strangle (Sell Strangle) Options Trading Strategy Comparison

Compare Collar and Short Strangle (Sell Strangle) options trading strategies. Find similarities and differences between Collar and Short Strangle (Sell Strangle) strategies. Find the best options trading strategy for your trading needs.

Collar Vs Short Strangle (Sell Strangle)

  Collar Short Strangle (Sell Strangle)
Collar Logo Short Strangle (Sell 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 Short Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of same underlying asset and expiry date. This strategy can be used when the trader expects that the underlying stock will experience a very little volatility in the near term. It is a limited profit and unlimited risk strategy. The maximum profit earn is the net premium received. The maximum loss is achieved when the underlying moves either significantly upwards or downwards at expiration. A net credit is taken to enter into this strategy. For this reason, the Short Strangles are Credit Spreads. The usual Short Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY S... Read More
Market View Bullish Neutral
Strategy Level Advance Advance
Options Type Call + Put + Underlying Call + Put
Number of Positions 3 2
Risk Profile Limited Unlimited
Reward Profile Limited Limited
Breakeven Point Price of Features - Call Premium + Put Premium two break-even points

When and how to use Collar and Short Strangle (Sell Strangle)?

  Collar Short Strangle (Sell 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.

The Short Strangle is perfect in a neutral market scenario when the underlying is expected to be less volatile.

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.

Neutral

When you are expecting little volatility and movement in the price of the underlying.

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

  • Sell OTM Call
  • Sell OTM Put

Sell 1 out-of-the-money put and sell 1 out-of-the-money call which belongs to same underlying asset and has the same expiry date.

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

A strangle has two break-even points.

Lower Break-even = Strike Price of Put - Net Premium

Upper Break-even = Strike Price of Call+ Net Premium"

Compare Risks and Rewards (Collar Vs Short Strangle (Sell Strangle))

  Collar Short Strangle (Sell 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

Unlimited

The maximum loss is unlimited in this strategy. You will incur losses when the price of the underlying moves significantly either upwards or downwards at expiration.

Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received

Or

Loss = Strike Price of Short Put - Price of Underlying - Net Premium Received

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

For maximum profit, the price of the underlying on expiration date must trade between the strike prices of the options. The maximum profit is limited to the net premium received while selling the Options.

Maximum Profit = Net Premium Received

Maximum Profit Scenario

Underlying goes up and Call option exercised

Both Option not exercised

Maximum Loss Scenario

Underlying goes down and Put option exercised

One Option exercised

Pros & Cons or Collar and Short Strangle (Sell Strangle)

  Collar Short Strangle (Sell Strangle)
Advantages

It protects the losses on underlying asset.

The strategy offers higher chance of profitability in comparison to Short Straddle due to selling of OTM Options.

Disadvantage

The profit is limited

Limited reward with high risk exposure.

Simillar Strategies Covered Put Bull, Call Spread, Bull Put Spread Short Straddle, Long Strangle