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What is collar strategy?
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What is collar strategy?

A collar strategy is a strategy implemented to protect against large losses, but it also limits large gains. It a strategy when you expect the price of the underlying security will go up or down over the long term but are unsure of shorter term prospects.

Long Collar

A long collar strategy is created by buying (or owning ) stocks while simultaneously buying a protective put and selling a call options against that holding. Both the put and call options are both out-of-the-money, having the same expiration date and must be equal in number of contracts. If the stock price goes down, the purchased put provides protection below the strike price until the expiration date. If the stock price goes up, profit potential is limited to the strike price of the covered call.

Short Collar

A short collar strategy is created by short selling stocks while simultaneously buying a protective call and selling a put option against that holding. Both the call and put options are both out-of-the-money, having the same expiration date and must be equal in number of contracts. If the stock price goes up, the purchased call provides protection above the strike price until the expiration date. If the stock price goes down, profit potential is limited to the strike price of the covered put.

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