Protecting Stock Gains with Collars and Ratio Option Structures
Summary
The document considers how a shareholder might protect gains after a large stock advance while retaining a longer-term position. The choices raised are selling shares, buying a short-dated out-of-the-money put, or using a collar. A longer-dated put is described as more costly, while a zero-cost collar can reduce upfront expense by selling a call, at the cost of capping gains above the call strike. The question also considers buying a longer-dated put and selling shorter-dated calls over time to offset its premium.
The answer favors a zero-cost collar and also sketches ratio structures: selling one call to finance two puts, or selling more calls to finance the same puts. These structures alter upside exposure and can create losses if the stock rises, as the answer notes. The examples are illustrative rather than a complete risk analysis. They omit option pricing inputs, taxes, assignment and exercise details, and suitability considerations; the described tradeoffs depend on strikes, maturities, volatility, and the investor’s objectives.
Key ideas
- A protective put limits downside while preserving stock ownership, but its premium can be costly.
- A collar finances some or all of a put’s cost by selling a call, which limits upside beyond the call strike.
- Rolling shorter-dated calls against a longer-dated put may offset premium but adds ongoing exposure.
- Ratio call and put structures change both upside participation and risk if the stock rises.
- The examples do not account for pricing inputs, tax effects, or full option mechanics.
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Full text
# To Collar or not to Collar # To Collar or not to Collar I have a conundrum. I have a stock that has had considerable price appreciation over the past year. Well over 100%. I no longer see any factor (or fundamentals) supporting it's current price (in the short term). Having said that though the long term may well see further price appreciation, but I believe that to be 6-9 months+. I have three options in trying to protect the capital / unrealized profit: 1) Sell the stock. Something I don't want to so because I like it for the long term and don't want to take a tax hit now. 2) Buy an near OTM put - thereby instituting a protective put strategy. 3) Create a Collar on the position. This is my predicament. Do I use option (2) or (3)? (2) Is quite feasible for a shorter dated option <45 days. It's not expensive to buy an OTM put and therefore won't erode capital/unrealized-profit. Buying a longer date put ~100 days is much more expensive and therefore will erode capital. (3) I have priced and can create a zero cost collar for a longer dated option ~100 days but for this to work (zero cost) I will have very little upside before the stock would be called. (3.1) Buy a longer dated put (6 months) and sell shorter dated calls (1 month) over time to recover the premium paid. The stock is reasonably volatile so for option (3) it could potentially move in to be called in the short term. ## Answer by rajah9 (score 0, accepted) https://quant.stackexchange.com/a/31822 I think your option 3, with a zero-cost collar, is a good way to go. Here's another option. You could also consider a ratio. Say you own 200 shares with the stock at \$100. Sell 1 \$105 call, and use the proceeds to pay for 2 \$90 puts. You would benefit on the upside movement of the stock. Or if you really don't think it'll go up much more and have the margin, sell 3 \$110 calls and pay for 2 \$90 puts. Here you would be hurt by an upside movement of the stock. See http://www.investopedia.com/terms/r/ratio_call_write.asp for the Ratio Call Write.
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