Protective Collar

Protective Collar: A protective collar is a Risk Management strategy used in financial markets to limit potential losses while allowing for some upside potential. It typically involves holding a long position in an Asset while simultaneously buying a protective put option and selling a call option at a higher Strike Price.

Example: An investor owns 100 shares of Company XYZ, currently trading at $50 per Share. To protect against a decline, the investor buys a put option with a strike price of $45 for $2 per share. To finance this, the investor sells a call option with a strike price of $55 for $3 per share. This creates a collar, limiting downside risk while capping upside potential.

Case: If the price of XYZ falls to $40, the investor can exercise the put option, selling the shares at $45, effectively limiting the loss. If the price rises to $60, the call option will be exercised, and the investor will miss out on gains above $55 but still profit from the Stock appreciation up to that level.