Put spread collar
Buy a put, sell a lower put, and sell a call. Protection starts sooner than a typical collar, but only covers a band of losses.
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 higher put’s strike. In the example, losses are stopped from about −10%.
- Where does it stop?
- Below the lower put’s strike. In the example, losses resume past about −30%.
- Is upside limited?
- Yes. Gains above the call’s strike, near +8% in the example, are given up.
- Is the cost known or unknown?
- Little or no up-front cost. The cost is the capped upside and the uncovered losses in a severe crash.
- Fits best when
- Your main concern is a moderate decline of 10% to 30%, and you want to keep the cost low.
- Watch for
- A crash deeper than the lower strike is not covered past that point.