A recent Options Lab compared the effectiveness of purchasing puts expiring in three months vs. puts expiring in 12 months ("Hedging with long puts," Futures & Options Trader, March 2008). The 12-month puts outperformed the three-month puts and lowered the stock portfolio’s volatility.

This test expands upon this approach by selling calls to help offset the cost of the long puts, which converts the position into an options collar (long stock, long put, short call). The goal is to determine which call strike price to select when creating a collar in this situation.