Question

On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You plan to sell your shares on December 21, 2021 and are concerned about downside risk. A put option on ABC stock with an exercise price (K) of $40 is currently priced (P) at $2 per share. Also, two call options on ABC stock with exercise prices (K) of $40 and $65 are priced (C) at $2.5 and $1.50 per share, respectively. All options expire on December 21, 2021. What will be net profit/loss per share on a long collar (use K=$65 call) if the stock price is $10 per share?

Answer 1

A long collar is an option strategy in which investor buy a stock, buy a put and sell a call.

Collar position = Long stock + Long Put + Short Call

Buy stock at (St) = $11

Buy Put (KP=$40) at (P) = $2

Sell Call (KC=$65) at (C) = $1.50

Stock Price at expiration (ST) = $10

Net profit/loss per share of collar position(P/L):