Next, buy the September 150 puts for $1.87 (last trade on Thursday). This gives you the right to sell the SPY at 1,500 to the seller of the put. If the market drops, the value of the put will rise correspondingly (less time-value deterioration, which is currently minimal, and why the strategy is cheap to execute). Combining the buys and sells will net $1.30 per share (or $1,300 per contract). Should the S&P rally another 5%, you risk the chance of getting called away, and losing the upside past 5%. (Of course, you can always buy back in.) If the S&P drops, the increase in the price of the put will protect you.
Note the put option date, which expires in September, is shorter than the call option date, which expires in December. Accordingly, it's critical to look the position in early September and unwind positions if needed. Also worth bearing in mind: I've simplified this by putting a collar on the market at large with the S&P 500. The strategy can work wonderfully well with individual stocks, too. Important Disclosure: Gary Goldberg Financial Services does not provide tax services. The content of this column is meant to foster a conversation between investors and their advisers and should not be viewed as tax, legal or investment advice. Follow @Opursche This article was written by an independent contributor, separate from TheStreet's regular news coverage.