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Covered Call Collar

 Profile Version / Simplified Version / Comprehensive Version

Purpose Of Covered Call Collar
1. To Protect A Covered Call Position From Drastic Drop In The Price Of The Underlying Stock.


Expectations Of Covered Call Collar
Up and Stagnant


Type Of Spread
Debit Spread


How To Use Covered Call Collar?
Write (sell to open) 1 contract of nearest out of the money call option for every 100 shares you own and then buy to open 1 Out of the Money (OTM) Put option for every 100 shares you own.

Sell OTM Call + Buy Stock + Buy OTM Put 		Covered Call Collar Risk Graph Learn How To Read This Chart



Profit Potential of Covered Call Collar:
The Covered Call Collar's maximum profit occurs when the stock closes exactly at the strike price of the short call options at expiration of the short call options.



Profit Calculation of Covered Call Collar:
1. If stocks are not assigned (called off) at expiration:

Profit = (value gained in stock + initial price of short call options - purchase price of OTM put options) / initial value of underlying stock

2. If stocks are assigned (called off) at expiration:

Profit = ((strike price of short call options - initial value of underlying stock) - purchase price of OTM put options + initial price of short call options) / initial value of underlying stock

3. If stocks have dropped in value at expiration but long put options remain out of the money:

Profit = (initial price of short call options - (initial stock price - stock price at expiration)) - purchase price of OTM put options) / initial value of underlying stock

4. If stocks have dropped in value at expiration and long put options are in the money:

Maximum Loss = (((initial price of underlying asset - strike price of OTM put option) + Purchase price of OTM put option) - initial price of short call options) / initial value of underlying stock


Risk / Reward of Covered Call Collar:

Upside Maximum Profit: Limited

Maximum Loss: Limited


Break Even Point of Covered Call Collar:
Stagnant Breakeven point = (Bid ask spread of short call option + Purchase price of OTM put option) / theta

Lower Breakeven point = (Initial Value of Short Call Options - Purchase price of long OTM put option) - Initial Value of underlying stock


Advantages Of Covered Call Collar:

  • Able to profit even if your stock stays stagnant.

  • Able to offset losses if your stock drops in value.

  • Loss is limited even if underlying asset drops in price drastically.


    Disadvantages Of Covered Call Collar:

  • You must continue to hold your stocks if you want to keep the short call options.

  • You can lose your stocks if it rises beyond the strike price of the short call options through assignment at expiration.

  • A narrower lower breakeven than a Covered Call.

  • Lower potential profit than a Covered Call.


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