Collar

A Collar strategy involves holding a long position in the underlying asset while simultaneously buying a put option for downside protection and selling a call option to generate premium income. It is typically used to limit potential losses while capping potential gains.

Significance:

• Ideal for neutral to slightly bullish conditions, where an investor wants to protect against downside risk.
• Buying an OTM put provides downside protection, while selling an OTM call helps reduce the cost of the put.
• Profit is capped at the strike price of the sold call, while losses are limited due to the protective put.

Example:

• NIFTY trading at 18,000.
• Hold 1 lot of NIFTY Futures at 18,000.
• Buy 17,800 Put at ₹100 and sell 18,300 Call at ₹120 (lot size = 50).
• Outcome:
  1. If NIFTY stays between 17,800 and 18,300 at expiry:
     • Both options expire worthless.
     • Net profit = ₹20 × 50 = ₹1,000 (premium received).
  2. If NIFTY rises to 18,500 at expiry:
     • Gain on futures = ₹25,000 (18,500 − 18,000).
     • Loss on sold call = ₹10,000 (₹200 × 50).
     • Net profit = ₹25,000 − ₹10,000 + ₹1,000 = ₹16,000 (capped).
  3. If NIFTY falls to 17,600 at expiry:
     • Loss on futures = ₹20,000 (17,600 − 18,000).
     • Gain from put = ₹10,000 (₹200 × 50).
     • Net loss = ₹20,000 − ₹10,000 + ₹1,000 = ₹9,000 (limited).