The Industry and Trade Newspaper will provide readers with insight into an attractive investment strategy, chosen by many investors when trading options contracts.
In this week's Q&A on commodity trading, the Industry and Trade Newspaper will provide readers with a deeper insight into an attractive investment strategy, chosen by many investors when trading options contracts. This strategy is highly regarded not only for its ability to optimize profits but also for its flexibility in risk management. This is strategy number 8 – the Collar strategy.
Collar Strategy
In commodity trading, the Collar strategy is implemented by simultaneously holding:
A long position in an underlying asset;
Buy an out-of-the-money (OTM) put option at strike price A;
Sell a call option that is currently at a loss at strike price B but on the same expiration date as the underlying asset owned by the investor.
This strategy is often used by investors holding long positions to hedge against the downside risk of the underlying asset by activating a put option, while the option premium earned from selling the put option is used to offset the amount the investor spent to buy the put option.
For example: An investor holds an open long position in a December 2024 corn contract (ZCEZ24) at 410 cents/bushel. The investor employs a Collar strategy by simultaneously buying a put option with a strike price of 400 cents/bushel and a premium of 25 cents/bushel, and selling a call option with a strike price of 430 cents/bushel and a premium of 30 cents/bushel.
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| Commodity Trading Q&A (Number 73): Options Trading Strategies (Part 8) |
Profits from the Collar strategy depend on the future price of the ZCEZ24 contract. The following scenarios are possible:
Case 1: The ZCEZ24 contract price falls below 400 cents/bushel.
Let's assume the market price of the ZCEZ24 contract on the expiration date is 385 cents/bushel. At this time, the investor would exercise the put option, receiving a profit of 400 – 385 = 15 cents/bushel. The call option would not be exercised; however, the investor would incur a loss of 410 – 385 = 25 cents/bushel from closing the open position. The investor would receive 30 cents/bushel from selling the call option, but would have to pay 25 cents/bushel for buying the put option. Thus, the investor would incur a loss of (15 – 25) + (30 – 25) = 5 cents/bushel in this case.
Case 2: The ZCEZ24 contract price rises above 400 cents/bushel, but does not exceed 430 cents/bushel.
Assuming the market price of the ZCEZ24 contract on the expiration date is 415 cents/bushel, the investor receives a profit of 415 – 410 = 5 cents/bushel from closing the open position. At this point, the investor neither exercises the put option nor the call option. The investor receives 30 cents/bushel from selling the put option, but pays 25 cents/bushel for buying the call option. Thus, the investor's profit in this case is 5 + (30 – 25) = 10 cents/bushel.
Case 3: The ZCEZ24 contract price exceeds 430 cents/bushel.
Suppose the market price of the ZCEZ24 contract on the expiration date is 450 cents/bushel. At this point, the investor receives a profit of 450 – 410 = 40 cents/bushel from closing the open position. Simultaneously, the investor must fulfill the obligation to sell the call option and immediately buy a ZCEZ24 contract at the market price, incurring a loss of 450 – 430 = 20 cents/bushel. The put option is not exercised. The investor earns 30 cents/bushel from selling the call option, but simultaneously spends 25 cents/bushel to buy the put option. Thus, the total profit for the investor in this case is (40 – 20) + (30 – 25) = 25 cents/bushel.
Source: https://congthuong.vn/hoi-dap-giao-dich-hang-hoa-so-73-cac-chien-luoc-trong-giao-dich-hop-dong-quyen-chon-phan-8-355749.html
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