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