← IntermediateLesson 16 · 5:01
Collar
Summary
You can build a collar on 100 shares by buying a put below the price and selling a call above it, and find its floor, ceiling and break-even. You can set it up close to zero cost, and you know what it gives up: every gain above the ceiling, with a loss down to the floor still possible.
Key terms
- collar
- Owning shares while buying a put below the price for a floor and selling a call above it for a ceiling.
- zero-cost collar
- A collar where the call pays about what the put costs, so no cash changes hands, though you give up the rise above the ceiling.
- floor
- The worst result a protected position can reach, set by the put's strike.
- ceiling
- The best result a capped position can reach, set by the sold call's strike.
- protective put
- Owning shares and buying a put on those same shares to put a floor under the loss.
- covered call
- Owning shares and selling someone the right to buy them from you at the strike price.
Check yourself
Answer each question to see why the right answer is right.
1. You own 100 XYZ shares at $100. You buy the $95 put for $141 and sell the $105 call for $158. Where do you start?
2. What is the most this collar can lose on the last day, and why?
3. XYZ rises to $120. What does the collar make compared with the shares alone?
4. What is a zero-cost collar?
5. With 30 days left and XYZ at $100, the collar moves about 44 cents for each $1 XYZ moves. If you close early after a fall, what do you get?
Finished the video and the quiz? .