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Short Put Vs Collar Options Trading Strategy Comparison

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

Short Put Vs Collar

  Short Put Collar
Short Put Logo Collar Logo
About Strategy A short put is another Bullish trading strategy wherein your view is that the price of an underlying will not move below a certain level. The strategy involves entering into a single position of selling a Put Option. It has low profit potential and is exposed to unlimited risk. A short put strategy involves selling a Put Option only. For example if you see that the shares of a Company A will not move below Rs 1000 then you sell the Put Option of that stock at Rs 1000 and receive the premium amount. The premium received will be the maximum profit you can earn from this trade. However, if the price of the underlying moves below 1000 then you will incur unlimited losses. 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 Put Call + Put + Underlying
Number of Positions 1 3
Risk Profile Unlimited Limited
Reward Profile Limited Limited
Breakeven Point Strike Price - Premium Price of Features - Call Premium + Put Premium

When and how to use Short Put and Collar?

  Short Put Collar
When to use?

Short Put works well when you're Bullish that the price of the underlying will not fall beyond a certain level.

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 the price or volatility of the underlying to increase marginally.

Bullish

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

Action
  • Sell Put Option

A short put strategy involves selling a Put Option only. So if you see that the shares of a Company A will not move below a 1000 then you sell the Put Option of that stock at 1000 and receive the premium amount. The premium received will be the maximum profit you can earn from this deal. However, if the price of the underlying moves below 1000 than you will incur losses.

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

Breakeven Point Strike Price - Premium
Price of Features - Call Premium + Put Premium

Compare Risks and Rewards (Short Put Vs Collar)

  Short Put Collar
Risks Unlimited

There is no limit to losses incurred in the trade. The risk is when the price of the underlying falls, and the Put is exercised. You are then obliged to buy the underlying at the strike price.

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

The profit is limited to premium received in your account when you sell the Put Option.

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 doesn't go down and options remain exercised.

Underlying goes up and Call option exercised

Maximum Loss Scenario

Underlying goes down and options remain exercised.

Underlying goes down and Put option exercised

Pros & Cons or Short Put and Collar

  Short Put Collar
Advantages

It allows you benefit from time decay. And earn income in a rising or range bound market scenario.

It protects the losses on underlying asset.

Disadvantage

It is a high risk strategy and may cause huge losses if the price of the underlying falls steeply.

The profit is limited

Simillar Strategies

Bull Put Spread, Covered Call, Short Straddle

Covered Put Bull, Call Spread, Bull Put Spread







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