Position
Sell a Call Option, Buy a Put Option (Bearish Collar)
Margin Requirement
Yes, pay the difference in premiums and post variable margin on the short call similar to futures in a rising market
Advantages
- Establishes a Minimum futures price
- Cost of Put is reduced by selling the Call
- Flexible, offset at any time
Disadvantages
- Limited benefit from higher futures price
- Capital expense of potential margin exposure
- Offsetting before expiration will change the cost & P/L (advantage in lower market, disadvantage in higher market)
When to Apply
- If market outlook is bearish, but flexibility to benefit from partial increase in prices is necessary or desirable
- If downside risk is undefined or hard to define
- In a neutral implied volatility environment
- To adjust a long put or put spread after an increase in price
Potential Adjustment
- In a rising market, roll up long put option to capture benefit from increase in price and/or roll up short call option to extend range of opportunity to benefit from rising prices
- In a falling market, buy back short call option to capture decay in premium, roll down long put option to capture drop in price, and/or sell lower strike put option to generate additional credit