The Collar Strategy in Binary Options

Many binary options strategies revolve around minimizing risk exposure. The Collar strategy in finance is an example of this strategy. It is a complex binary options strategy utilized by experts for them to minimize their risk and cut their losses. Many seasoned traders categorize the Collar strategy as neutral or arbitrary because it requires the purchase of PUT and CALL binary options concurrently. As you may have already noticed, many strategies revolve around this technique.

The Collar strategy has appealed to many traders because of its capability to provide a constant influx of profit while minimizing risk exposure. But, like many strategies, the Collar involves concepts that are not straightforward and will take time and experience to perfect. As a result, novices are advised to avoid this strategy until they have learned enough trading skills and gained much experience at binary options trading. However, despite this disadvantage, the Collar promises many benefits to those who are willing to learn the technique.

Mechanics of the Collar Strategy

Many strategies work around making simultaneous PUT and CALL options. The Collar basically involves the purchase of both PUT and CALL binary options at exactly the same time. The idea behind this technique is to minimize risk exposure when the markets are stagnant and the price may not reach a pre-determined goal before the trade expires. When a trader implementing this procedure and manages to substantially reduce his risks, then he would have had a ‘free collar’.

This is how it specifically works. Think of a trader that has purchased a PUT binary option structured on a bearish asset that is trending downwards. Traders who are performing this strategy are assumed to know the risks involved. They must appreciate that whenever activating such a trade, he will be risking a portion or his entire investment each time he enters a trade. This is because at execution, a trader’s new position stands to lose more than it can gain.

However, every trader should also know that this problem can easily be countered by initiating a collar strategy which will involve purchasing both CALL and PUT binary options that have exactly the same parameters such as the type of asset, amount invested, and trade expiry. Executing the collar would practically neutralize the risks involved but still provide the opportunity to profit should a bear movement materialize as anticipated.

For the trader to execute the PUT trade mentioned, he must also purchase two other options: one Put, and one Call for both out-of-the-money results. The purchase should be done simultaneously to get the same strike price. The trader is now able to implement a “Collar” strategy. In effect, the trader executes a short position based on the chosen asset and minimize risk at the same time. The sum required in purchasing the Call option would be almost complemented by the Put trade.

Example

The Collar strategy’s effectiveness can be validated by the following example. It shows why this strategy is favored among many professional traders. For example, assume that a Put option defined in the above section results to an in-the-money status as the price of the asset plunges as predicted. This scenario is what would have actually happened if the trader had just simply purchased a Put option on its own. Profit is awarded depending on the trade conditions.

However, one of the major advantages of the Collar strategy is that the initial investment of the Call binary option would be reduced to zero by expiration if price continued to fall. This event implies that the downside risks of opening a single Put binary option would be negated by the Call option, as instigated by the Collar strategy. It is as if the trader is putting some sort of buffer to make up for the loss, just in case the initial Put ends up out-of-the-money.

Here’s what happens. After the trade expires, the trader will be able to collect a return from his in-the-money Put option while the premium for the Call would be paid for the earnings of the other Put option as if the second pair of trades cost nothing at all. Specifically, the trader would have generated a winning position while subjecting his equity to minimum risks. This is one of the reasons why the Collar is well rated and appreciated.

But, as with any binary options strategy, the trader needs the basic items to enable him to successfully trade this advanced strategy. Acquiring significant skills and experience in fundamental and technical analysis would be best used with Collar in trading binary options. Another is the access to an account supporting the ‘pending orders’ feature. This is discussed in the next section. Lastly, the Collar can be implemented in almost every available asset.

Traders will also gain the advantage of being able to implement the Collar strategy even if there are currently other binary option trades that are active. The Collar Strategy is also used as an effective method to hedge positions. For instance, if market sentiment indicates that a certain asset is currently bearish, then traders need to make a Put and Call option. Similarly, if investor sentiment favors bullish movements, then traders can hedge their bets vis-à-vis.

Pending Order

The tallest hurdle in initiating the Collar strategy properly is the need for an advanced account with the chosen binary options broker. These accounts often have additional utilities such as capabilities to support ‘pending orders’. As of the moment, there are not too many binary options brokers offering this ability. However, as the industry grows, traders are advised that constantly watch out for new techniques provided by brokers.

For brokers that provide such feature, traders may need to upgrade their accounts with a total sell functionality that will enable them to immediately make Put contact at a certain time. As such, traders constantly consult with their brokers as their first step in implementing the Collar strategy. Often, a top range Gold or VIP account is required to have access to these facilities offered by binary options brokers. To avail of this, traders may have to make a considerable deposit that often exceeds $5,000.

We have compiled a list of top binary brokers that provide advanced features to handle trade actions required for different strategies such as the Collar. Building a strategy to support the tools available on the platform can easily put the trader in an advantageous position. All new traders need to do is to be comfortable with the visuals of the trading interface, and be familiar with the features that they can utilize.

Read more articles on Strategy.

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