A SPDR S&P 500 ETF (SPY) collar

A collar – which is buying a put and selling a call on an underlying stock or index you own – is a protective strategy for long positions. For investors who have long SPDR S&P 500 ETF (NYSE: SPY) positions, or who want to establish new ones at these levels today, this March collar may offer a suitable risk/reward profile. You will essentially have a covered call position plus a protective put. The following strike selection may also offer the opportunity to initiate the trade for a net credit.

SPY Collar Trade Detail

The SPY is trading at $106.25.

Collar Strategy

• Buy 100 shares of SPY for $106.25
• Sell the March 107 call for $2.80
• Buy the March 104 put for $2.80
• Net debit of $0.00 for each spread

(Even money as of 10am ET.)

On the initial rally this morning after the jobs number, this collar could have been done for a credit of 50 cents. As the market moves lower, the put premium will exceed the call premium and it will cost a debit to enter this strategy. Factor this into your risk/reward preferences.

By opening a free virtual trading account with OptionsHouse, you could build a profit/loss diagram to help visualize this trade.

Profit/Loss Details:

Maximum risk: Maximum risk for the option spread is truly zero (excluding commissions). Maximum loss on the long SPY position is theoretically unlimited to the zero mark.

Maximum potential profit: $1.14 (the strike price of the call minus the purchase price of the underlying plus the premium received).

More on SPY:

S&P 500 Correction: How Low Can It Go?

Remember, trading Ideas are generated by the ONN Idea Generating Platform as a starting point for people to begin their own research. Trading ideas are not intended as trading or investment advice or recommendations that any particular security or strategy may be suitable for any specific person. You are solely responsible for your investment decisions, but we hope that some of these ideas will give you a starting point as you look for strategies to employ.

Keep an eye on the “Trading Idea” section of www.ONN.tv for more ideas from nine different option trading strategies, courtesy of the ONN Idea Generating Platform.