With the S&P very close to its all-time high, many investors who have ridden the market up are looking to get a bit of protection, and rightfully so.
Many are turning to options, and option users have a bunch of, well, options to choose from when they're looking for a protective strategy. A common one is the covered call, which simply means selling a call against a long position. Although it doesn't provide much protection, it does generate premium that we get to keep no matter what, and that premium can soften the blow if our stock sells off slightly.
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Another common alternative is to purchase puts, which provide a ton of protection, all the way down to zero. The problem is that while a covered call generates income, a put costs money—sometimes a lot of money.
What if we combine those two trades, the covered call and the long put? We would then have a collar. Since a collar is short a call, it's only appropriate against long stock, but when we are long shares at the top, that is when we should be using a collar. And the S&P is very close to its all-time high as we enter a stretch on the calendar—September and October—that has often presented problems for the broad market.
For someone long the S&P 500 ETF (SPY), establishing a protective collar right now might make sense.
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