Saturday, December 20, 2008 2:30:01 AM
A collar can be established by holding shares of an underlying stock, purchasing a protective put and writing a covered call on that stock.
Purchasing a protective put = stop losses
writing a covered call would limit your maximum gain if the stock price keep going up but you still have a chance to lose a lot of money.
e.g. u buy FAS @23.6 and sell a 25 call for $3.80,
if stock go to 35, your max gain is 30-23.6+3.80=10.20, not 11.4;
if stock go to 10, your loss is (10-23.6)+3.88=-9.72;
if you also buy a 20 Put for $3.0,
if stock go to 35, your max gain is (30-23.6)+3.80-3=7.20;
if stock go to 10, your max loss is (20-23.6)+3.80-3=-2.80;
if you buy a 15 Put for $1.35 instead,
if stock go to 35, your max gain is (30-23.6)+3.80-1.35=8.85;
if stock go to 10, your max loss is (15-23.6)+3.80-1.35=-6.15;
Purchasing a protective put = stop losses
writing a covered call would limit your maximum gain if the stock price keep going up but you still have a chance to lose a lot of money.
e.g. u buy FAS @23.6 and sell a 25 call for $3.80,
if stock go to 35, your max gain is 30-23.6+3.80=10.20, not 11.4;
if stock go to 10, your loss is (10-23.6)+3.88=-9.72;
if you also buy a 20 Put for $3.0,
if stock go to 35, your max gain is (30-23.6)+3.80-3=7.20;
if stock go to 10, your max loss is (20-23.6)+3.80-3=-2.80;
if you buy a 15 Put for $1.35 instead,
if stock go to 35, your max gain is (30-23.6)+3.80-1.35=8.85;
if stock go to 10, your max loss is (15-23.6)+3.80-1.35=-6.15;
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