Collar Strategy

From this section onwards, we will start with different volatility and range-bound strategies. First, let us begin with the understanding of a ‘Collar Strategy.’

A collar strategy is a combination of a covered call and a protective put. It can be devised by

• Buying the stock ( either cash or futures)
• Selling out of the money call
• Buying out of the money Put

This strategy limits the return of the stock or the portfolio to a specified range and can hedge a position against the volatility of the underlying asset.

If the stock rises, this strategy performs like a covered call. If the stock declines, this strategy limits the loss at the put strike price

• A collar strategy limits both gains and losses.
• The payoff from the strategy is similar to a Bull Call Spread
• Collars may be used when investors want to hedge a long position in the underlying asset from short-term downside risk.

Option Chain:

We can see that if the stock rises, this strategy performs like a covered call. If the stock declines, this strategy limits the loss at the put strike price.

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