Collar

The term collar is used for a strategy that is used as a protective measure taken after there are substantial gains in the stock market. For execution of collar, an investor purchases an out of the money put option and at the same time sells an out of the money call option. You can also term it as ‘hedge wrapper’ and is imposed to put a general restriction on stock market activities. As the investor holds a long position in the stock, he earns benefits as the price of shares increases. For implementing a collar strategy successfully, the strike price of the selling call must be high than the put he’s buying. The expiration date must also be same on both the options. The main purpose of the collar strategy is to limit the downward risk. It mainly protects profits, instead of generating them. Even though they protect investors from massive losses, even huge gains can be prevented by them.

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Edited and Updated 31st May 2014

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