The Collar strategy make possible to trade binary options while minimizing risk. The idea of the collar strategy is to reduce the cost of an option transaction when the market is stagnating or cannot reach the price wanted before your binary options contract expires.
Minimize Risk Exposure By Using the Collar Strategy
Risk is an intrinsic element of trading in the financial markets. But there are myriad techniques that can help to mitigate risk exposure when the markets do not perform as expected. The Collar Strategy is an especially robust strategy for minimizing losses when trading binary options. To effectively apply this technique, you must have an intimate understanding of the dynamics of the financial markets.
Collar Strategy Basic Concept
The basic concept behind this technique is buying a call option and selling a put option or vice-versa, at the same time. The aim is to mitigate some of the costs and potential losses involved in purchasing an option by working against the market trends and selling the option. Sometimes, it is possible to completely recuperate the purchasing cost; this results into a costless collar.
Collar Strategy Examples
This trading strategy is best applied when you are uncertain about the price movements of the underlying assets. In essence, the goal is to protect your asset within a certain price range. For example say you bought a $2.25 call option. To completely offset the transactional cost of purchasing the call option, you should sell a call option for the same amount within the same trading session. At the end of the expiry period, the amount you would receive from selling call options would equal the amount spent on buying the puts. Even then, you can structure your collars to pay or receive a premium. This allows you to liquidate an out of the money option.
By doing so, you would practically neutralize your risks but still provide yourself with the opportunity to profit should a bear movement materialize as anticipated. The basic purpose of this strategy is just to protect the underlying assets from extreme loss and also this protects the substantial gain.
A trader decides to purchase a binary option Call on the Microsoft asset at USD 40 when the price of Microsoft is currently being traded at USD 35. The price of the Call option is 2 dollars. If the trader sells at the same time a Put option at USD 30 that has also cost him 2 dollars of issue, he therefore compensates the price of his Call option and has succeeded in achieving what is called a free Collar.
In summary, the collar strategy is an advanced technique that can help to hedge your positions. In a bearish market, it would be best to buy a put option and sell a call option concurrently. At the same time, if the asset is displaying a bullish price movement, you can mitigate risk by selling a put option and buying a call option.