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Covered Call Vs Collar Options Trading Strategy Comparison

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

Covered Call Vs Collar

  Covered Call Collar
Covered Call Logo Collar Logo
About Strategy A Covered Call is a basic option trading strategy frequently used by traders to protect their huge share holdings. It is a strategy in which you own shares of a company and Sell OTM Call Option of the company in similar proportion. The Call Option would not get exercised unless the stock price increases. Till then you will earn the Premium. This a unlimited risk and limited reward strategy. Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income. 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
Market View Bullish Bullish
Strategy Level Advance Advance
Options Type Call + Underlying Call + Put + Underlying
Number of Positions 2 3
Risk Profile Unlimited Limited
Reward Profile Limited Limited
Breakeven Point Purchase Price of Underlying- Premium Recieved Price of Features - Call Premium + Put Premium

When and how to use Covered Call and Collar?

  Covered Call Collar
When to use?

The covered call option strategy works well when you have a mildly Bullish market view and you expect the price of your holdings to moderately rise in future.

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.

Market View Bullish

When you are expecting a moderate rise in the price of the underlying or less volatility.

Bullish

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

Action
  • Buy Underlying
  • Sell OTM Call Option

Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income.

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

Breakeven Point Purchase Price of Underlying- Premium Recieved
Price of Features - Call Premium + Put Premium

Compare Risks and Rewards (Covered Call Vs Collar)

  Covered Call Collar
Risks Unlimited

Maximum loss is unlimited and depends on by how much the price of the underlying falls. Loss happens when price of underlying goes below the purchase price of underlying.

Loss = (Purchase Price of Underlying - Price of Underlying) + Premium Received

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

Rewards Limited

You earn premium for selling a call. Maximum profit happens when purchase price of underlying moves above the strike price of Call Option.

Max Profit= [Call Strike Price - Stock Price Paid] + Premium Received

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

Maximum Profit Scenario

Underlying rises to the level of the higher strike or above.

Underlying goes up and Call option exercised

Maximum Loss Scenario

Underlying below the premium received

Underlying goes down and Put option exercised

Pros & Cons or Covered Call and Collar

  Covered Call Collar
Advantages

It helps you generate income from your holdings. Also allows you to benefit from 3 movements of your stocks: rise, sidewise and marginal fall.

It protects the losses on underlying asset.

Disadvantage

Unlimited risk for limited reward.

The profit is limited

Simillar Strategies Bull Call Spread Covered Put Bull, Call Spread, Bull Put Spread