Protective Collar

The protective collar is another out-of-money transaction and works as follows:

1. You will purchase an out-of-money put option.
2. You then write an out-of-money call option on the same investment.
3. You would then review how well the gains on the stock move.

This is a collar option where the goal is to have the price move above the call strike. As with the bull call option, this works with a set series of maximums for the profits and losses involved. The biggest gains will be realized when the stock price goes beyond the call strike price. Meanwhile, the greater losses are when the stock is below the put strike price. The value of the option can move anywhere in between the two if the stock price is between the two strike prices you have set up.

This is perfect if you have shares in something and you want to find a way to profit from them without actually having to sell. The protective collar allows you to attain a premium based on when the call option that you offered is exercised. The total value of the premium will vary based on the value of the stock and how far you will go with it, so make sure you look at how this will be applied to your investment.