The protective collar will involve two strategies known as a protective put and covered call.

About Covered Call Collar

The protective put involves a long put option and underlying security. The covered call involves a long underlying security and short a call option. The call and put have the same expiry month and number of contracts.

The collar is the best strategy for beginner and allows a trader to capitalize on the upside. We use collars if they are bullish on the stock for the long run. An investor may use a collar when they have gain in stock without risk. The investor implements a collar option strategy to protect the profits which is already generated. Past performance of a security or strategy does not guarantee future results or success. Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses.

Options trading subject to TD Ameritrade review and approval.

Please read Characteristics and Risks of Standardized Options before investing in options. Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request. This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc. All rights reserved. Key Takeaways Understand the dynamics of options calendar spreads and the market conditions that might be suitable Learn how and when diagonal spreads might be appropriate for rolling a single option to another strike and expiration date. The trade will display in the Positions and Simulated Trades pane, where you can make adjustments to the number of contracts, expiration, strike price, and type of order. Chart source: the thinkorswim platform from TD Ameritrade. Past performance does not guarantee future results.

When Calendar Met Vertical: A Diagonal Spread Tale

Are options the right choice for you? Learn more about the potential benefits and risks of trading options. Start your email subscription. Recommended for you. Related Videos. Learn the Setup, the Roll Decision, and the Risks 3 min read.

Options Trading Made Easy: Diagonal Bull Collar

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TD Ameritrade is not responsible for the content or services this website. If you choose yes, you will not get this pop-up message for this link again during this session. As mentioned, setting the trade requires ownership of shares of the underlying. A put is then purchased with an expiry of roughly three months duration, ensuring that any downside is minimized in the event of a sell-off.

The short call is simultaneously purchased to offset the cost of the long put. You suspect the stock may be in for a substantial jump higher, but because nothing is certain, you opt to open a diagonal bull collar. At the end of August you open the trade red circle.

As it turns out, the stock meanders sideways through expiration in October, the short call expires worthless, and you find yourself sitting on a free long put — and the shares — with just a week to go before earnings. You played it safe, but the added diagonal feature opened up tremendous profit potential that, in the end, found its way into your pocket. As mentioned, upside potential on the trade is theoretically unlimited. On each of these specific days, you could be making thousands of dollars in extra cash.

With minimal risk.