How to Use Options Collars to Hedge Your Stock Gains

Core Insights - The stock bull market is reaching new highs, prompting investors to consider strategies to protect profits without incurring capital gains taxes [1] - An options collar strategy is recommended as a way to hedge against potential market downturns while maintaining exposure to future gains [1][2] Options Collar Overview - An options collar involves writing a covered call and buying a protective put, providing a balanced approach to risk management [2][5] - This strategy is particularly useful for investors who want to safeguard their investments without selling their winning stocks [2] Mark Cuban's Case Study - Mark Cuban utilized an options collar strategy during the 2001 dot-com bubble to protect his Yahoo shares, which he acquired for $5.7 billion [3][4] - By implementing this strategy, Cuban managed to cash out over $1 billion from his Yahoo stake while many others lost their fortunes [4] Mechanics of an Options Collar - The options collar consists of two legs: writing a covered call and buying a put option, with strike prices determined by support and resistance levels [5] - For example, Intel (INTC) can be used to illustrate the execution of an options collar, with a focus on protecting profits over a 31-day period [7] Trade Execution Example - On March 5, 2024, INTC was trading at approximately $43.18, and a covered call was written with a strike price of $44 [8] - The call option premium of $1.50 provides downside protection down to $41.60, while allowing for potential upside if INTC exceeds $44 [11] Potential Outcomes - If INTC closes between $42 and $44, the investor retains shares and profits from the call premium [13] - If INTC closes above $44, shares are called away at $44, resulting in additional profits [14] - If INTC falls below $42, the put option provides downside protection, allowing the investor to retain shares and a small premium profit [14] Strategic Application - The options collar strategy can be employed not only for profit protection but also for generating income through careful selection of strike prices [15]