The Collar is a sophisticated binary options strategy deployed by experts with the intent of minimizing their risk exposure. Many professional traders classify the Collar strategy as an arbitrage technique since it necessitates the buying of PUT and CALL binary options concurrently.
This particular strategy has the appealing capability of being able to create a constant stream of profits with minimum risk exposure. However, the concepts involved are not straightforward and require time to master. Consequently, novices should avoid this strategy until they have amassed sufficient skill and experience at binary options trading. Despite these negatives, the Collar presents many benefits to those willing to persevere with its intricacies.
What is a Collar Strategy?
What is this strategy all about and what does it entail? The Collar essentially involves the opening of both PUT and CALL binary options at precisely the same time. The basic concept behind this strategy is to minimize risk exposure when the markets are stalling and price may not achieve a pre-determined target before expiration. If by implementing this procedure, you manage to substantially reduce your risks, then you would have achieved a status referred to as a ‘free collar’.
For example, imagine that you have executed a ‘PUT’ binary option structured on a bearish asset that is trending downwards. You must appreciate that whenever you activate such a trade, you will be risking a portion of your equity each time. This is because at execution, your new position stands to lose more than it can gain.
In contrast, you can counter this problem by initiating a collar strategy which will involve you executing both CALL and PUT binary options possessing identical parameters, i.e. asset type, expiry time and wagered amount, etc. 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 biggest problem that you will encounter in order to instigate the Collar strategy properly is that you will need an advance account with your binary options broker that is capable of supporting ‘pending orders’. Be advised that presently most of these firms do not service such features.
For instance, in order to execute the PUT trade presented above, you must have the ability to purchase both ‘out-of-the-money’ PUT and CALL binary options simultaneously. By initiating such a Collar strategy, you would in effect execute a short position based on your chosen asset without incurring practically any risk whatsoever. This is because the sum entailed in purchasing your CALL binary option would be almost completely negated by selling your PUT one.
As just stated, you may need an upgraded account that features a total sell functionality that will enable you to immediately sell your PUT contact back to your broker. As such, you must consult with your broker as your first step if you want the capability of implementing the Collar Strategy. Quite often, you may need to quality for a top range Gold or VIP account in order to obtain the facilities required. However, be warned that you may have to make a considerable deposit in order to open such an account that often exceeds $5,000. This is one of the main reasons why the Collar is not deemed suitable for novices.
Example of a Collar Strategy
The effectiveness of the Collar strategy can be confirmed by the following example which demonstrates why it is such a firm favorite with professional traders. For instance, assume that the PUT option defined above attains an ‘in-the-money’ status as the price of your asset plunges as predicted. This is exactly the same process that you would have witnessed if you had just simply instigated a PUT binary option, just on its own.
However, the major benefit of the Collar is that, at the same time, the initial premium of your CALL binary option would be reduced to zero by expiration if price continued to fall. This feature implies that the downside risks of opening a single PUT binary option would be negated by a Collar strategy.
This is because after your expiry time elapses, you will be able to collect a return from your ‘in-the-money’ PUT option while your CALL one would incur you in no costs at all. Specifically, you would have generated a winning position while subjecting your equity to minimum risks. You can now begin to appreciate why the Collar is so well rated.
However, you need two basic items to enable you to successfully trade this advanced strategy. The first is that you must acquire significant skills and experience at trading binary options. The second is that you must have access to an account supporting the ‘pending orders’ feature. Another enticing feature about the Collar is that you can apply it to almost every available asset.
You will also gain the advantage of being able to implement the Collar strategy even if you have other binary option trades active already. You can also successfully utilize the Collar Strategy as an effective method to hedge your positions. For instance, if market sentiment indicates that a certain asset is currently bearish, then you need to purchase a PUT binary option and sell a CALL one simultaneously. Similarly, if investor sentiment favors bullish movements, then you can hedge your bets by purchasing a CALL binary option and selling a PUT one.