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+280 Part Ill: Put Option Strategies 
+apiece. Thus, the protection would have cost nothing and there would still be unlim­
+ited profit potential on 500 of the shares of XYZ, since only five calls were sold against 
+the 1000 shares that are owned. 
+In this manner, one could get quite creative in constructing collars - deciding 
+what call strike to use in order to strike a balance between paying for the puts and 
+allowing upside profit potential. The lower the strike he uses for the written calls, the 
+fewer calls he will have to write; the higher the strike of the written calls, the more 
+calls will be necessary to cover the cost of the purchased puts. The tradeoff is that a 
+lower call strike allows for more eventual upside profit potential, but it limits what 
+has been written against to a lower price. 
+Using the above example once again, these facts can be demonstrated: 
+Example (continued): As before, the same prices exist, but now one more call will 
+be brought into the picture: 
+XYZ: 61 
+Apr55 put: l 
+Apr 65 call: 2 
+Apr 70 call: l 
+As before one could sell five of the Apr 65 calls to cover the cost of ten puts, or 
+as an alternative he could sell ten of the Apr 70 calls. If he sells the five, he has unlim­
+ited profit potential on 500 shares, but the other 500 shares will be called away at 65. 
+In the alternative strategy, he has limited upside profit potential, but nothing will be 
+called away until the stock reaches 70. Which is "better?" It's not easy to say. In the 
+former strategy, if the stock climbs all the way to 75, it results in the same profit as if 
+the stock is called away at 70 in the latter strategy. This is true because 500 shares 
+would be worth 75, but the other 500 would have been called away at 65 - making 
+for an average of 70. Hence, the former strategy only outperforms the latter if the 
+stock actually climbs above 75 - a rather unlikely event, one would have to surmise. 
+Still, many investors prefer the former strategy because it gives them protection with­
+out asking them to surrender all of their upside profit potential. 
+In summary, one can often be quite creative with the "collar" strategy. One thing 
+to keep in mind: if one sells options against stock that he has no intention of selling, he 
+is actually writing naked calls in his ovm mind. That is, if one owns stock that "can't" 
+be sold - perhaps the capital gains would be devastating or the stock has been "in the 
+family" for a long time - then he should not sell covered calls against it, because he will 
+be forced into treating the calls as naked (if he refuses to sell the stock). This can cause 
+quite a bit of consternation if the underlying stock rises significantly in price, that could 
+have easily been avoided by not writing calls against the stock in the first place.