RedGage

Collar trades are not a panacea for all the world’s trading ills. They have some serious flaws to be watched and monitored. You need to pay attention to the value of your options to determine whether they are too far out-of-the-money or too close. You also need to be concerned about expiration of the options to the underlying contract and whether you should be risking accumulated profits at all when making trading decisions.The collar trade is heavily reliant on options and how well they coincide with the underlying position. There is a fine balance between how much premium can be collected on the option sold versus how much money must be spent on the protective option. If the collected premium is only a fraction of the value of the purchased option, then the unlimited risk associated with it and the capping of your underlying contracts profits must be weighed carefully against what you hope to gain in return.In many cases, each time an option was sold the collected premium was the equivalent of at least one-third the value of the potential loss on the protective option. You should consistently target this amount in your trading, while at the same time attempting to achieve a one-for-two risk ratio when it comes to risk and reward goals. This can be a difficult balancing act, but it must be consistently attempted to achieve the maximum benefit from using a collar.Couple the price balancing act with the fact that options can expire prior to the underlying contract and that means there must be constant vigilance on the part of the trader in watching the different moving parts of a collar. Target profits must be strictly maintained, and there must be a willingness to hold on to the underlying contract until expiration to cover the costs of a potential sold in-the-money option occurring. For the retail trader who is intent on trading like the professionals, monitoring multiple bits of information simultaneously is a juggling act that is well worth the effort, as long as your principal is safe.