Industry and Trade Newspaper will bring readers an overview of an attractive investment strategy, chosen by many investors when trading Options Contracts.
In this week's Q&A on commodity trading, Cong Thuong Newspaper will bring readers a deeper insight into an attractive investment strategy, chosen by many investors when trading Options Contracts. This is a strategy that is highly appreciated not only for its ability to optimize profits but also for its flexibility in risk management. That is strategy number 8 - Collar strategy.
Collar Strategy
In commodities trading, the Collar strategy is implemented by simultaneously holding:
Open buy position of an underlying asset;
Buy an Out of The Money (OTM) put option at strike price A;
Sell a call option at the loss at strike price B but on the same expiration date of the same underlying asset that the investor owns.
This strategy is often used by investors holding open long positions to hedge against the downside risk of the underlying asset by triggering a put option, while the option premium earned from selling the call option is used to offset the investor's cost to buy the put option.
For example, an investor holds an open position of long December 2024 Corn (ZCEZ24) at 410 cents/bushel. The investor implements a Collar strategy by simultaneously purchasing a put option with a strike price of 400 cents/bushel for a premium of 25 cents/bushel and selling a call option with a strike price of 430 cents/bushel for a premium of 30 cents/bushel.
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| Commodity Trading Q&A (No. 73): Strategies in Trading Options Contracts (Part 8) |
The profit from the Collar strategy depends on the future price of the ZCEZ24 contract. The following scenarios are possible:
Case 1: ZCEZ24 contract price falls below 400 cents/bushel.
Suppose the market price of the ZCEZ24 contract on the expiration date is 385 cents/bushel. The investor will now exercise the put option, receiving a profit of 400 – 385 = 15 cents/bushel. The call option is not exercised, but the investor suffers a loss of 410 – 385 = 25 cents/bushel from closing out the open position. The investor will receive 30 cents/bushel for selling the call option, but must pay 25 cents/bushel for buying the put option. Thus, the investor suffers a loss of (15 – 25) + (30 – 25) = 5 cents/bushel in this case.
Case 2: ZCEZ24 contract price increases above 400 cents/bushel, but does not exceed 430 cents/bushel
Suppose 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 time, the investor does not exercise the put option and the call option is not exercised. The investor receives 30 cents/bushel from selling the put option, but must pay 25 cents/bushel to buy the call option. Thus, the investor has a profit of 5 + (30 – 25) = 10 cents/bushel in this case.
Case 3: ZCEZ24 contract price exceeds 430 cents/bushel.
Suppose the market price of the ZCEZ24 contract on the expiration date is 450 cents/bushel. The investor now receives a profit of 450 – 410 = 40 cents/bushel from closing the open position. At the same time, the investor will have to 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 receives 30 cents/bushel from selling the call option, but at the same time must spend 25 cents/bushel to buy the put option. Thus, the investor's total profit 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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