Option combination strategies
Besides buying or selling single options, there are many other possible strategies that involve positions in multiple options simultaneously, as well as combining options with positions in the underlying assets. While there are infinite combinations possible, we outline one common combination below.
A protective collar strategy is a combination of a protective put and a covered call strategy. The long put option protects the investor from a downward move in the underlying asset’s price, while writing a call option generates a premium that offsets (some) of the cost of buying the long put (though it also limits the upside potential). This combination can be used to lock in unrealized gains in the underlying asset without having to sell the shares right away. If the underlying asset’s price declines, the position is insured against losses via the long put option. Conversely, if the price of the underlying asset increases beyond the strike price of the call options, it will be exercised, with the investor selling the shares and realizing any gains.