The Collar

A conservative and protected stock ownership strategy is to collar the stock. You buy an out of the money (OTM) put under your stock and finance it by selling an OTM call above it.

In fact, you are financing your out of the money put protection (think downside insurance) by selling the call. Yes, it limits your upside potential but it also completely defines your risk. In all options spreads completely limiting your risk always comes with capping your rewards.

This is a particularly attractive strategy when the stock pays a dividend. Let's take Microsoft (MSFT) as an example. MSFT pays a $0.28 dividend on November 19 so we will use December options.

At this writing (9:00 CDT) MSFT is trading at 32.75. You can buy the December 30 put at .55 and sell the  35 call at .55. An even money collar, in other words.

I am protected at any move below 30 and have locked in my dividend unless assigned early on the .35 call. In that case, I make 2.25, or 6.8% in two months time.

A simple and conservative strategy with a well defined risk and reward. Just the so