Collar
Collars are a bullish strategy with low risk and limited reward.
How it works: The investor purchases stock, and the collar is created by combining covered
calls and protective puts. The collar behaves like a bull spread.
Example: The investor buys 100 shares of stock at $50, for a total cost of $5,000. To enter
the collar, you A) sell an out-of-the-money call and B) buy an out-of-the-money put. In this
example, the investor would sell a $60 call for $3 and buy a $40 put for $2.50, leaving the
total cost of the transaction at $4,950.
The payoff: If the stock stays in the $40-$60 range, it gains when the stock goes up and loses
when the stock price falls. The maximum profit comes when the stock rises to $60. The maximum
loss comes when the stock drops to or below $40, although the profits on the put offsets the
loss of the stock.
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