It consists of a covered call, with part or all of the premium received used to buy a put. Costless Collar: This strategy enables you to construct a collar that establishes a trading band for your XYZ holdings, at no or minimal upfront cost.This strategy would not require you to exercise your ESOs and can be pursued as a stand-alone strategy as well. If the stock does not decline below $150 within three years' time, you would lose the full $7,100, and if the stock trades between $135.80 and $150 by then you would recoup part of the premium paid. You would break even if XYZ trades at $135.80 and would make money if the stock trades below that level. Your outlay in this case would be $7,100 for five contracts. You think the stock could trade below $150 over the next three years, and therefore buy the three-year $150 puts that are available at $14.20. This strategy of buying puts will only provide you downside protection, but will not resolve the time decay issue. Buy Puts: Let’s say that although you are a loyal XYZ employee, you are a tad bearish on its prospects. ![]() Another alternative is to write one call contract one year out, another contract two years out, and three contracts three years out. (Note that your shares are unlikely to be called away well before the three-year expiration because the option buyer would not wish to lose time value through early exercise). If the stock rockets higher and your XYZ shares are "called" away, you would still receive $250 per XYZ share, which along with the $10.55 premium, equates to a return of almost 50%. If the stock goes sideways or trades lower over the next three years, you pocket the premium, and repeat the strategy after three years. ![]() You therefore write five contracts (each contract covers 100 shares) with a strike price of $250, which would fetch you $10.55 in premium (per share), for a total of $5,275 (excluding costs such as commission, margin interest etc.). While writing naked or uncovered calls can be a very risky business, in this case your short call position would be covered by the 500 shares you can acquire through the exercise of the ESOs.
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