Conservative Profits in an Options Trade with No Downside Risk

I’m a fairly conservative trader, so I always like the sound of low risk or controlled risk trading strategies. Probably one of the lowest risk plays in the options playbook out there is the collared stock. Collared stock essentially functions the same as a covered call, where you buy a 100 shares of stock and sell a call on the stock. The only difference is with a collar, you add in the insurance of a LEAP put, so if your equity drops at any point in the trade, you are safely protected and will insure no significant downside loss. Pretty handy.

It’s important to understand the affects collars have on your profit margins with a covered call. Basically you are looking at the option taking out somewhere around 10 percent of your profit every single year if you buy a LEAP one year out, and right around 7-8 percent of your profit every single year if you buy your LEAP two years out. Considering covered calls typically generate around a 3 percent ROI per month, that’s right around 2-3 months worth of profit you are sacrificing in exchange for having downside protection. So, is it worth it?

I’d say it depends on your trading style. The one significant weakness of a covered call risk graph is the obvious lack of downside protection. If you are the kind of trader who prefers to be certain about risk rather than protection of your potential profits, the added security of a put on your covered call might be a great option for you.

Just remember that collared stock is probably the utmost conservative play in the options playbook. This is some serious granny stuff we’re talking about here, something I probably wouldn’t play myself just because well, even I’m not that conservative. But like I said, if you enjoy safe, humble profits every month with no downside risk, grab yourself some collared stock and make yourself some money.

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