The Interest Rate Collar Strategy

The interest rate collar strategy is normally used after the portfolio has experienced substantial gains. It involves options to protect the portfolio like a put option, however, this is a cheaper form of protection.

The Collar

The collar is the simultaneous buying of the out-of-the-money put financed by writing the out-of-the-money call. These collar strategies prevent extreme losses.

Interest Rate

In the case of the interest rate collar, any extreme raising of interest rates can make a bonds portfolio lose money fast. In the event, that the Federal Reserve decides to continue raising rates, the bonds will go into a significant bear market possibly wiping out any short term gains in the portfolio.

Strategy

That's why in a time where the bonds have reached a peak, it is best to impute the collar strategy which is an inexpensive way to protect the long-term gains in the portfolio. Even though we can expect the bond prices to rise higher, the strategy is to sell the higher strike price call as the target price to liquidate the portfolio or rollover a newer collar to renew and lock in higher gains in the portfolio.