So 2007 Q 2 A says their best choice is equity collar and oen of the reasons is that it preserves some upside appreciation as that is one of theri requirement. Um…how? Short Call, and Long put at the same strike…price doesnt go up or down…where is the upside there?
Equity collar was an “easy” elimination for me becasue of the lack of upside, now the evil folks at CFAI says it has upside?
If someone did an equity collar with the way you specified - they could hold on to the position - and end up looking like have sold the position and yet continue to have it on their books. This tax authorities do not like.
So for an equity collar one has to give up a little upside (15% or so) and give up a little downside (15% or so). This is done by using slightly different strike prices on the put and call (and those CANNOT equal the current stock price).
This provides a little upside and a little downside on the collar.
Eh, tricky question. I didn’t realize the answer either until I googled collars and realized that the strike price of the put won’t be equal to the strike price of the call for a zero-cost collar. I imagine the put’s strike price would be smaller than the call’s strike price, in which case if you add your initial long stock position, you end up with a payoff graph that sort of looks like a bull spread (i.e. small upside appreciation).
I was under the impression that for a zero-cost collar, the put strike will be less than the call strike, so regardless of any constructive sale rules, the zero-cost collar will necessarily provide a little upside.
Collar would be at price of underlying…so if ytu had a stock at 50 you’d buy put 50 and short call at 50. I don’t know where the premium falls into it, unless you wanted to structure it so that the premium netted to zero then it may not be where strike is exacly the priceof the underlying, but instead where the premiums are priced to offset each other.