I am trying to figure out the collar graph, which is a combination of protective put and covered call.
What i am not getting is the lower part of the graph and why it is below zero and not zero. My reasoning goes as follows:
The lower part of the collar is the sum of the increase in stock price, value of the shorted call option when X is less than S and the value of the long put option when X is less than S.
Putting all of these together would lead to a zero profit as the loss in the value of the put option is offset by the increase in value of the stock price and since it is a zero cost collar, the premiums net each other off and thus the zero profit.
If stock price does not go below the strike price of the put, the option will not be exercised, you only lose the premium you’ve paid for it. Premia for long put and short call might not be exactly the same. I guess that’s why.