Collar Example

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The Collar Options Strategy Explained in Simple Terms

Collar Example

Assume an investor is long 1,000 shares of stock ABC at a price of $80 per share, and the stock is currently trading at $87 per share. The investor wants to temporarily hedge the position due to the increase in the overall market's volatility.

The investor purchases 10 put options (one option contract is 100 shares) with a strike price of $77 and a premium of $3.00 and writes 10 call options with a strike price of $97 with a premium of $4.50.

• Cost to implement collar (Buy $77 strike Put & write $97 strike call) is a net credit of $1.50 / share.
• Breakeven point = $80 + $1.50 = $81.50 / share.

The maximum profit is $15,500, or 10 contracts x 100 shares x (($97 - $1.50) - $80). This scenario occurs if the stock prices goes to $97 or above.

Conversely, the maximum loss is $4,500, or 10 x 100 x ($80 - ($77 - $1.50)). This scenario occurs if the stock price drops to $77 or below.