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.