Collar Strategy

Collar is a strategy that is devised when an investor is holding shares in the underlying and feels that the underlying position is good for “medium to long term” but is moderately bullish on the near term.

In Collar, an investor sells a Call option on a stock he owns. The investor also buys a Put Option to insure against the fall in the price of the underlying. This is a low risk strategy since the Put prevents downside risk. The profits are also capped on the upside because the Call sold prevents profits when the underlying rallies.

Investor view: Neutral to bullish on direction.

Risk: Limited.

Reward: Limited.

Breakeven: Stock Price – Call premium + Put premium

In the above chart, the breakeven happens the moment Nifty crosses 5375.

The reward is limited to 6250 [calculated as (Difference in adjacent Sell Call strike price and Underlying Buy price + premium received) * Lot Size].

The risk is limited to 3750 [calculated as (Difference in adjacent Underlying Buy price and Buy Put strike price – premium received) * Lot Size].

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