Collar
Buy a put below today’s level and sell a call above it. The premium from the call pays for some or all of the put.
The payoff
The whole portfolio at the end of one year, for any market move. Dashed: no hedge. Green: with the hedge.
Hedged portfolioUnhedged
Modeled with Black-Scholes pricing at 18% implied volatility. Hypothetical and illustrative only. Simulator and chart results are modeled, not actual trades or client results, and are not a prediction or a recommendation.
- When does it start protecting?
- At the put’s strike. In the example, a put 20% below today’s level stops losses at about −20%.
- Where does it stop?
- It doesn’t. Losses below the put strike are offset until expiration.
- Is upside limited?
- Yes. Gains above the call’s strike are given up. In the example, the cap is near +8%.
- Is the cost known or unknown?
- Little or no up-front cost. The real cost is unknown: the gains above the cap you give up if the market rallies.
- Fits best when
- You want a floor with little out-of-pocket cost and can accept a ceiling on gains for a year.
- Watch for
- In a strong year, the gap between the market and a capped portfolio can be large.