Straddle is neither bullish nor bearish strategy; it is a market neutral strategy. Here a trader wishes to take advantage of the volatility in the market. This strategy involves buying of one Call option and one Put option of the same strike price, same expiry date and of the same underlying asset. Now a trader is bound to make profits once stock moves in either direc
This Strategy is implemented when the investor requires downside protection for the short - to medium term but at lower cost. Buying protective puts can be an expensive proposition and writing OTM calls can defray the cost of the puts quite substantially. Protective Collar is considered as bearish to neutral strategy. In this strategy risk and reward is both are limited. This ..
Lower Breakeven = Strike Price of Put - Net Premium, Upper breakeven = Strike Price of Call + Net Premium
Purchase Price of Underlying + Net Premium Paid
LONG STRADDLE Vs PROTECTIVE COLLAR - When & How to use ?
LONG STRADDLE
PROTECTIVE COLLAR
Market View
Neutral
Neutral
When to use?
This options strategy is work well when and investor market view is bearish. The strategy minimizes your risk in the event of prime movements going against your expectations.
This Strategy is implemented when the investor requires downside protection for the short - to medium term but at lower cost.
Action
Buy Call Option, Buy Put Option
• Short 1 Call Option, • Long 1 Put Option
Breakeven Point
Lower Breakeven = Strike Price of Put - Net Premium, Upper breakeven = Strike Price of Call + Net Premium
Purchase Price of Underlying + Net Premium Paid
LONG STRADDLE Vs PROTECTIVE COLLAR - Risk & Reward
LONG STRADDLE
PROTECTIVE COLLAR
Maximum Profit Scenario
Max profit is achieved when at one option is exercised.
• Call strike - stock purchase price - net premium paid + net credit received
Maximum Loss Scenario
Maximum Loss = Net Premium Paid
• Stock purchase price - put strike - net premium paid - put strike + net credit received
Risk
Limited
Limited
Reward
Unlimited
Limited
LONG STRADDLE Vs PROTECTIVE COLLAR - Strategy Pros & Cons
LONG STRADDLE
PROTECTIVE COLLAR
Similar Strategies
Bear Put Spread
Bull Put Spread, Bull Call Spread
Disadvantage
• There should be continuous movement of the stock and options price for this strategy to be profitable. • Time decay hurts long option if the strike price, expiration date or underlying stock are badly chosen.
• Potential profit is lower or limited.
Advantages
• Unlimited potential beyond the breakeven point in either direction . • Book your profit from highly volatile stocks without determining the direction. • Limited risk, more profit.
