Q: What does it mean when investors say they're using a "collar" option strategy?
A: Hearing options traders talk can be like listening to another language.
They give their investing strategies catchy names, ranging from butterfly spreads to straddles and condors. One of these strategies, which you're asking about, is the collar.
The collar is used by investors who are bullish on a stock, but still want to hedge their bets. The collar strategy is created by combining two other options strategies: a protective put and a covered call.
The protective put lets you limit your downside on a stock that may fall. Meanwhile, the covered call lets you set a price at which you're willing to unload your stock. It's kind of like setting a "buy it now" price on an eBay auction.
Combining those two strategies creates the collar, which lets you protect yourself on the downside of a stock a little less expensively than some other strategies.
The collar is a good strategy if you want to protect your gains in a stock that has run up or reduce the cost of protecting your portfolio from a decline, according to TradeKing's "Options Playbook."
If you're interested in learning more about options strategies, consider checking out "Options Playbook" in the library, or the Chicago Board Options Exchange's Options Institute.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at firstname.lastname@example.org. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz