can someone plz explain how you are insured up to $45 in the example below? i thought if the stock goes up even a bit more than 55, then you lose on your call and the put you bought expires worthless. thanks. " Collar Example: You own 100 shares of XYZ @ $50 Buy Dec 45 put @ 1 Sell Dec 55 call @ 1 The call credit pays for the put; transaction is costless ( before commissions). Your stock position is ‘insured’ up to $45, and your profit is capped at $55 to the December expiration. "
Buying a put restores any losses below $45, and selling the call gives away any profits above $55. Therefore your final outcome will always leave you with somewhere between $45 and $55 with no cost from the options. If the stock goes above $55 you collect $55 and pay out the overage on the call.
because your put option at $45 allows you to sell the shares you hold for at least $45. All this collar does is limit your loss to 10% and your gain to 10%. whats hard to understand?
thanks guys. my mistake, i wasnt thinking about the fact that he already owns the stock and so just sells it for the higher price and pays out the overage on the call like thems said.
insured up to $45 means that you are guaranteed a pay out of at least $45 (because of the put) remember “insurance” is typically associated with payoff in a bad event (stock goes down) I don’t see how bringing up an example of stock going up is any relevant to what you asked simple as that, you could’ve said insured up to $45 without even mentioning the call option
The call option is just part of the strategy that generates a premium to pay for the put. Generally called a zero cost collar.
Remember with this though that if the stock drops quickly (say to $45 with time still remaining until exercise) the value of the bought put will increase from the pruchase price and the call premium will decrease. If the stock was at $45, you would be able to sell the put for more than you bought it for and buy back the call for less than you sold it for. This will help close the gap on the $5 loss on the purchase price of your shares.