From this section onwards, we will start with different volatility and range-bound strategies. First, let us begin with the understanding of a ‘Collar Strategy.’
A collar strategy is a combination of a covered call and a protective put. It can be devised by
- Buying the stock ( either cash or futures)
- Selling out of the money call
- Buying out of the money Put
This strategy limits the return of the stock or the portfolio to a specified range and can hedge a position against the volatility of the underlying asset.
If the stock rises, this strategy performs like a covered call. If the stock declines, this strategy limits the loss at the put strike price
- A collar strategy limits both gains and losses.
- The payoff from the strategy is similar to a Bull Call Spread
- Collars may be used when investors want to hedge a long position in the underlying asset from short-term downside risk.
We can see that if the stock rises, this strategy performs like a covered call. If the stock declines, this strategy limits the loss at the put strike price.