Long Call Vs Collar Options Trading Strategy Comparison

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

Long Call Vs Collar

	Long Call	Collar


About Strategy	A Long Call Option trading strategy is one of the basic strategies. In this strategy, a trader is Bullish in his market view and expects the market to rise in near future. The strategy involves taking a single position of buying a Call Option (either ITM, ATM or OTM). This strategy has limited risk (max loss is premium paid) and unlimited profit potential. When the trader goes long on call, the trader buys a Call Option and later sells it to earn profits if the price of the underlying asset goes up. When the trader buys a call, he pays the option premium in exchange for the right (but not the obligation) to buy share or index at a fixed price by a certain expiry date. This premium is the only amount at-the-risk for trader in case the mark... Read More	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	Beginners	Advance
Options Type	Call	Call + Put + Underlying
Number of Positions	1	3
Risk Profile	Limited	Limited
Reward Profile	Unlimited	Limited
Breakeven Point	Strike Price + Premium	Price of Features - Call Premium + Put Premium

When and how to use Long Call and Collar?

	Long Call	Collar
When to use?	A long call Option strategy works well when you expect the underlying instrument to move positively in the recent future. If you expect XYZ company to do well in near future then you can buy Call Options of the company. You will earn the profit if the price of the company shares closes above the Strike Price on the expiry date. However, if underlying shares don't do well and move downwards on expiry date you will incur losses (i.e. lose premium paid).	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're expecting a rise in the price of the underlying and increase in 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 Call Option A long call strategy involves buying a call option only. So if you expect Reliance to do well in near future then you can buy Call Options of Reliance. You will earn a profit if the price of Reliance shares closes above the Strike price on the expiry date. However, if Reliance shares don't move up within the expiry date you will incur losses.	Buy Underlying Buy 1 ATM Put Option Sell 1 OTM Call Option
Breakeven Point	Strike Price + Premium The break-even point for Long Call strategy is the sum of the strike price and premium paid. Traders earn profits if the price of the underlying asset moves above the break-even point. Traders loose premium if the price of the underlying asset falls below the break-even point.	Price of Features - Call Premium + Put Premium

Compare Risks and Rewards (Long Call Vs Collar)

	Long Call	Collar
Risks	Limited The risk is limited to the premium paid for the call option irrespective of the price of the underlying on the expiration date. Max Loss = Premium Paid	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	Unlimited There is no limit to maximum profit attainable in the long call option strategy. The trade gets profitable when price of the underlying is greater than strike price plus premium. Profit = Price of Underlying - (Strike Price + Premium Paid)	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 closes above the strike price on expiry.	Underlying goes up and Call option exercised
Maximum Loss Scenario	Underlying closes below the strike price on expiry.	Underlying goes down and Put option exercised

Pros & Cons or Long Call and Collar

	Long Call	Collar
Advantages	Buying a Call Option instead of the underlying allows you to gain more profits by investing less and limiting your losses to minimum.	It protects the losses on underlying asset.
Disadvantage	Call options have a limited lifespan. So, in case the price of your underlying stock is not higher than the strike price before the expiry date, the call option will expire worthlessly and you will lose the premium paid.	The profit is limited
Simillar Strategies	Protective Put, Covered Put/Married Put, Bull Call Spread	Covered Put Bull, Call Spread, Bull Put Spread

1 Comments

1. Justin Gilead

| Link|Aug 16, 2022 8:47:47 PMReply

You partially get it wrong! The max loss will be the equivalent of the call premium paid for a single call position, indeed ; for a synthetic call options, it will be likened to the call options premium that you actually haven't paid as the call position has just been replicated along with the help of a long put and a long underlying though. For instance, if you purchase an ITM put, in addition to the long underlying, then the overall cost will be quite high, but the max risk entailed in the position will be the equivalent of the cheap OTM call options (only time value) that stands on the other side and on the same strike. In short, you may pay more to risk less with a synthetic options ; it definitely does the trick for hedging purposes then.

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