How To Buy A Collar on an Existing Position
A collar is a stock/option combination created when a stock is purchased along with two options positions: a Covered Call and Married Put combination. The collar limits both downside losses and upside gains through the expiration date. A collar can be initiated on an existing position or with a buy order on a stock. Here are the steps to buy a collar on an existing position.
1. Right click on the position line on the chart to open the drop down menu
2. Select Sell to open {1} Covered Call
The number of calls listed in the menu will equate to the nearest 100 share value below the amount owned. For example, if 250 shares are owned, the number will be 2 Covered Calls, which would equal 200 shares. The other 50 shares would not be involved in the combined position.
This places a Sell ticket on the chart for the correct number of call contracts.
3. Select Expiration Date
Change the expiration date either to closer or further dates using the arrows
Alternately, select a specific expiration date from the drop down menu
4. View available strike prices with the limit price line
Click and drag the Limit line between the available strike prices for the selected expiration date. These are represented by the hash marks at the left of the P&L Zones. Simply stop at the desired strike for the contract.
5. Select the order type desired for the contract
Either leave the order set on Limit, or select a different order type from the drop down menu.
6. Set a Limit Price (optional)
The Limit slider shows the spread between the natural (in this case, the bid) and the far (in this case, the ask). To set a price within the spread at which to place your order, click at any point on the slider. The limit value is seen in the price field next to the "Lmt" order type.
7. Use a Step to Limit order (optional)
Another way to take advantage of the spread is the Step to Limit order. Choose the Step to Limit order from the drop down menu.
Set the beginning of the slider at the limit price desired for the initial order. This will be the limit price at which the order will be entered.
Over the predetermined time period the limit price will be automatically modified down from the initial entry price toward the Natural (or selected) price. The step limit order will attempt to secure a preferable fill price in this process. Modification stops if no preferable fill is received and the limit price reaches the Natural.
8. Set the duration (time-in-force) for the order
9. Submit the order
Click Sell to open call
Click Place Order to confirm and submit
10. Click the Buy button at the bottom of the price pane to open the drop down menu
11. Select Buy to Open (x) Married Put(s)
This places a Buy ticket on the chart for the correct number of put contracts.
12. Select Expiration Date
Change the expiration date either to closer or further dates using the arrows (should match expiration for the Call option)
Alternately, select a specific expiration date from the drop down menu
13. View available strike prices with the limit price line
Click and drag the Limit line between the available strike prices for the selected expiration date. These are represented by the hash marks at the left of the P&L Zones. Simply stop at the desired strike for the contract.
14. Select the order type desired for the contract
Either leave the order set on Limit, or select a different order type from the drop down menu.
15. Set a Limit Price (optional)
The Limit slider shows the spread between the natural (in this case, the bid) and the far (in this case, the ask). To set a price within the spread at which to place your order, click at any point on the slider. The limit value is seen in the price field next to the "Lmt" order type.
16. Use a Step to Limit order (optional)
Another way to take advantage of the spread is the Step to Limit order. Choose the Step to Limit order from the drop down menu.
Set the beginning of the slider at the limit price desired for the initial order. This will be the limit price at which the order will be entered.
Over the predetermined time period the limit price will be automatically modified down from the initial entry price toward the Natural (or selected) price. The step limit order will attempt to secure a preferable fill price in this process. Modification stops if no preferable fill is received and the limit price reaches the Natural.
17. Set the duration (time-in-force) for the order
18. Submit the order
Click Buy to Open Put
Click Place Order to confirm and submit
19. View The Order
The current stock position along with the short call and long put will now appear on the chart. The P&L zones show the potential profit as it relates to the stock's current price. In this case, part of the current profits are protected but the potential gains are limited. Should the options expire without being exercised, the stock position is retained. Potential profits are reduced by the amount of the net premium for the option positions.
The trading tools work on either a LIVE brokerage account or a PAPER (simulated) trading account. Live market trading requires an account with TC2000 Brokerage (www.TC2000Brokerage.com).