← Strategy LabLesson 10 · 4:15
Collar
Summary
Use a collar when you own shares and want a floor under them without paying much for it: you buy a $95 put for $1.41 and pay for it by selling a $105 call for $1.58, a $17 credit. Your worst case is a $483 loss below $95 and your best case is a $517 gain above $105. You break even at $99.83, 17 cents below the $100 you paid.
Key terms
- collar
- Owning shares while buying a put below the price for a floor and selling a call above it for a 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.
- called away
- Having your shares sold at the strike price because you were assigned on a call you sold.
- T plus zero line
- The blue line on the chart showing your result today, if you closed the trade right now.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
Check yourself
Answer each question to see why the right answer is right.
1. In the lesson's collar, what pays for the $95 put?
2. XYZ ends at $90 on the last day. What is your result on the collar?
3. XYZ ends at $110 on the last day. What is your result?
4. Where does the lesson's collar break even on the last day?
5. With XYZ at $95 and nothing else changing, what does time do to your result?
Finished the video and the quiz? .