Should We Use Collars and Put Credit Spreads?

Looking at the pros and cons

It’s time for a new educational article, as we got a very relevant question from one of our premium members.

Will you also cover other strategies?

Let’s take a closer look at the collar strategy. This strategy has a capped pay-off profile to both the down- and upside, which could be of great interest to you considering the increased volatility. The collar strategy involves owning stock, selling an out-of-the-money call option and buying an out-of-the-money put in the same expiration.

It’s similar to selling a put credit spread, assuming you’d sell an in-the-money call. Mathematically, it seems to make a lot of sense to test this strategy and elaborate on the pros and cons.

Just as a side-note: last Friday, the markets were down roughly 2% (small caps down 2.9%). Meanwhile, our portfolio was up slightly and continues to benefit from positive time decay. The goal remains unchanged: rational excess cash management based on where implied volatility/VIX is standing.

The question to be addressed in this blog: can the collar strategy or credit put spread improve our strategy’s risk/reward profile given their capped downside risk? Let’s find out.

Our Strategy

Before we go into some third-party research on put spreads, we’d like to recap our strategy: