Collar Trade in Molson Coors: Options

CHICAGO (TheStreet) -- Shares of Molson Coors(TAP Quote) are up 18% since reaching a July low of $41.86, and are virtually even with their 52-week high of $49.88.

Today, one investor put on a bear synthetic in anticipation of limited upside in TAP throughout the next year.

Just before 1 p.m. EST, the January 2011 45 puts traded 5,000 times versus open interest of 451 contracts. The January 2011 55 calls also traded 5,000 times and were home to current open interest of 364 contracts. In this bear synthetic, the customer bought the put and sold the call in a strategy often referred to as a collar. (For more on collar strategies, tune into Options Physics on ONN.tv.)

In this instance, the customer sold the January 2011 55 calls for around $3.50 and bought the January 2011 45 puts for around $4.80. All together, he or she paid about $1.30 for the spread. The reason that this strategy is called a collar is because if the investor is long stock, they have effectively "collared" their returns. If the stock goes below 45 at expiration, the puts kick in and the customer does not lose any more money.

In exchange for that protection, the customer has sacrificed any upside above the $55 level by selling the 55 calls. If the stock exceeds $55 at expiration, then the investor will be called away on their shares, thus capping their gain.

This collar trade also gives us a chance to look at something called skew. Option traders use skew to describe the difference in implied volatilities from one strike to the next in the same expiration month. For example, in this trade, the price of $4.80 in the January 45 puts translates to an implied volatility of roughly 31 with the stock at $49.51, while the price of $3.50 in the January 2011 55 calls translates to an implied volatility of 26.