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Could someone explain the drawbacks of this option collar strategy on PPL? It looks to me that there is minimum risk. I use Robinhood for my trades and pay no commissions/fees.

  • Buy 100 shares for $2,587
  • Buy a Jan 21, 2022 $25 put for $435
  • Sell a Jan 21, 2022 $25 call for $360

If I understand this correctly, I can only lose $162, right?

  • -$2,587 -$435 +$360 +$2,500

PPL pays a quarterly dividend of about $0.413 per share. If PPL is above $25 at expiration the put will expire worthless and the $25 call will exercised. Including 6 dividends, the profit will be:

  • -$2,587 -$435 +$360 +(6 * $.413 * 100) +$2,500 = $85.80

Earning 2.3% per year doesn't look like much but it is better than what some CDs or banks offer. I understand the risk of dividends being cut, inflation and that the call owner can decide to purchase the shares before the expiration date (which is hard to do with Robinhood). Are there other risks with this strategy?

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A collar involves using options with different strike prices. Your strike prices are the same and therefore it is technically an arbitrage strategy called a conversion.

Yes, -$162 is the maximum loss. However, it is highly unlikely that you will collect all of the dividends (possibly none) if PPL rises because your in-the-money short calls will be exercised early and you will be assigned, locking in some or all of the potential loss of $162.

  • Thank you again Bob! I wonder what strategy you use when you trade? I am all about minimizing risk. Any suggestion? I used to invest high risk because I just bought stocks and ETFs without collateral or stop orders, but now that I know about options I am realizing how I can protect my portfolio while squeezing a bit more money. – lgalico Jul 6 '20 at 20:58
  • As it turns out, I use the collar strategy on most of my large equity positions (note that a long stock collar is synthetically equivalent to a vertical spread). My objective is modest growth with limited risk (I leave the tails to others). For stocks that I wish to own despite a collapse (see the Feb/Mar drop), I defend by rolling the long puts down, sometimes pyramiding them and sometimes rolling the short calls down. Because of this, I currently own several large cap stocks that have lost 1/3 to 1/2 their value but I my account value hasn't been dinged. Risk management is options 201 ;->) – Bob Baerker Jul 6 '20 at 21:23
  • Got it, Thanks for the input. so far I am down about $400 since I started trading options but learning a lot from this. – lgalico Jul 8 '20 at 14:07

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