Can be difficult to execute such strategies quickly. Requires big margin to execute this strategy. 12.Collar A collar can be established by holding shares of an underlying stock, purchasing a protective put and writing a covered call on that stock. The option portions of this strategy are referred to as a combination. Generally, the put and the call are both out of-the-money when this combination is established, and have the same expiration month. Both the buy and the sell sides of this combination are opening transactions, and are always the same number of contracts. In other words, one collar equals one long put and one written call along with owning 100 shares of the underlying stock. Expectation: An investor will employ this strategy after accruing unrealized profits from the underlying shares, and wants to protect these gains with the purchase of a protective put. At the same time, the investor is willing to sell his stock at a price higher than the current market price so an out-of-the-money call contract is written, covered in this case by the underlying stock Situation: Suppose you purchased 100 shares of L&T ltd. at Rs.240 in may and would like a way to protect your downside with little or no cost. You would create a collar by buying one May 220 put at 10 and selling one May 260 call at 15. Net credit is Rs.5 Maximum profit: When share is at 260. Maximum loss: When the share is at or below 220.
Share Price @220 Stock price @240 Stock price @260
Possible Outcomes at expiry The profit from the put offsets the loss from the stock. The profit would be equal to the net inflow i.e. Rs.5 The profit on the stock is exactly offset by the loss on the call option that was sold.
Advantages
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