FINRA Series 7Investment Information and Suitable RecommendationsHard
A client, aged 60, has a substantial portfolio of highly appreciated growth stocks and is concerned about protecting their gains while still participating in some upside potential. They also want to generate some income from their holdings. Which options strategy would be MOST suitable for this client?
- AShort Strangle
- BLong Call
- CCollar
- DLong Straddle
Show answer & explanationAnswer & explanation
Correct answer: C. Collar
A collar strategy (long stock, long put, short call) is ideal for clients who want to protect existing gains in a long stock position (via the long put) and generate income (via the short call), while being willing to cap their upside potential.
Why the other options are wrong
- A. A short strangle (short out-of-the-money call and put) profits from low volatility and generates income, but it exposes the client to significant downside and upside risk, not protection.
- B. A long call is a bullish strategy that profits from stock appreciation; it provides no protection for existing gains and costs money, rather than generating income.
- D. A long straddle is a volatility strategy (long call and long put at same strike/expiration) that profits from large price movements, not for protecting gains or generating income.
Collar Strategy
A collar is an options strategy that involves owning shares of stock, buying an out-of-the-money put option to protect against a price decline, and selling an out-of-the-money call option to generate income. It limits both potential gains and losses.
- Used to protect long stock positions.
- Generates income from selling the call.
- Caps upside potential at the call's strike price.
- Limits downside risk to the put's strike price.
Memory trick: Collar: Cover, Option, Limit, Loss, and Receive.