Investment Type: Debit
Strike Prices: OTM for both Call and Put
Expiration Month: current month for Call sold leg, no restriction for Put bought leg
Composition: Buy Stock + Sell call + Buy Put

 
  Collar Profile Chart  
 

 
Description:

 

Collar is Covered Call + Buy Put (act as an insurance). This strategy offers low risk low reward strategy and mainly pays off in the long term. The maximum risk and reward for collar really depends on the selection for the Sell Call and the Buy Put. The goal here is to use the premiums received to finance the Put insurance.

 
  Example  
 

 

Entry:


Initial Investment = $5,000 (or based on 5% money management rule)
Buy 100 MSFT Stock @ 34

 

Stock Price :
$34.00
   
Buy/Sell :
Sell
    
Strike Price :
35 Call
 } Premium: $0.80
Expiration Date :
December
No of Contracts :
1
    

 

Stock Price :
$34.00
   
Buy/Sell :
Buy
    
Strike Price :
32.5 Put
 } Premium: $0.60
Expiration Date :
December
No of Contracts :
1
    

 

Investment @ Entry = (Stock Price x 100 Shares) + (Premium of Call Sold Leg x No of Contracts x 100) + (Premium of Put Sold Leg x No of Contracts x 100) = $3,400 + ($80) + $60 = $3,380

 

Breakeven Point = Stock Price + Sold Leg premium + Bought Leg premium = $34.00 + ($0.80) + $0.60 = $33.80

 

Exit:

 

Best Case Scenario:

Stock Price :
 $35.00 Up $1.00
    
Strike Price :
35 Call
 } Premium: $0.00
Expiration Date :
December

 

Stock Price :
 $35.00 Up $1.00
    
Strike Price :
32.5 Put
 } Premium: $0.00
Expiration Date :
December

 

Profit @ Exit = (Stock Price x 100 Shares) + (Premium of Call Sold Leg x No of Contracts x 100) + (Premium of Put Sold Leg x No of Contracts x 100) – Investment @ Entry = $3,500 + $0 + $0 - $3,380

= $120

 

Return of Investment = Profit @ Exit / Investment @ Entry = 4%

 

Worst Case Scenario : (Difference between Strike Prices – Profit @ Exit) x No of Contracts

 

Stock Price
Profit/Loss
ROI
30.00
-130

-4%
32.50
-130

-4%
35.00
120

4%
37.50
120

4%
40.00
120

4%