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Definition of 'Collar'
1. A protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing an out of the money put option while simultaneously writing an out of the money call option.
Also known as "hedge wrapper".
2. A general restriction on market activities.
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Investopedia explains 'Collar'
1. The purchase of an out-of-the money put option is what protects the underlying shares from a large downward move and locks in the profit. The price paid to buy the puts is lowered by amount of premium that is collect by selling the out of the money call. The ultimate goal of this position is that the underlying stock continues to rise until the written strike is reached.
2. An example is a circuit breaker which is meant to prevent extreme losses (or gains) once an index reaches a certain level.
Collars can protect you against massive losses, but they also prevent massive gains.
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Guard your finances in uncertain times with this options strategy.
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Find out which protective or bullish collar will result in your optimal risk/return level.
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This options strategy will help you lock in profit while keeping your upside potential.
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Understanding the concept of equivalent positions will help you trade more efficiently and save money on trade fees.
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A good place to start with options is writing these contracts against shares you already own.
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Learn various tactics for divesting your overexposure to any one stock.
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Learn how put options can act as insurance for volatile stocks in your portfolio.
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Think your favorite stock is on the way down? This simple option-trading strategy can help you manage your risks without selling the stock.
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Collars are extremely flexible, and can be much more beneficial to your portfolio than asset allocation.
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