The Collar: options trading strategy with put protector and call covering
The collar is realized departing from a bought position of stocks on which a put becomes a protector and a covered call so the price of exercise of the buy of the put is lower than the selling of the call. The fundamental objective of this strategy is to limit the price of selling the stocks inside a band of oscillation, being very important to realize the protection with a cost of zero, that is to say, the cost of the premium of the put is financed by the cashing of the premium of the call and if it was possible that the clear prime is received.
It is for this motive for which to this strategy zero usually add the terms of protector or of cost.
If the price of the underlying rise and overcomes the strike of the sold call, it will be exercised and, therefore, the maximum benefit is formulated of the following form:
Maximum benefit = Price of exercise of the sold call – Price of buy of the stocks – or clear premium (as it is paid or received, respectively)
Nevertheless, if it lowers the price of the underlying one below the strike of the put bought losses will have, at first, that limit themselves to the following formulation:
Maximum loss = Price of buy of the stocks – Price of exercise of the put bought – or clear premium (as it is paid or received, respectively)
Since it turns out to be logical, if the price of the underlying stock is between both prices of exercise (strike) the options will not be exercised and the result of the operation comes determined by the deadlock:
Price of buy of the stocks – or clear premium (as it is paid or received, respectively)
There will be benefit if the price is top and a loss in the opposite case.
The difficulty of this strategy is to manage to compensate the cost of the put bought by means of the selling of the call.
On the other hand, the result that is obtained by the collar is the same that the bought call spread. Both are equivalent, although the disintegrated composition of these strategies is distant very much, especially because in the collar one of the components is the portfolio of stocks.