Investments, tenth edition

  Collars 

 A     collar    is an options strategy that brackets the value of a portfolio between two bounds. Sup-

pose that an investor currently is holding a large position in FinCorp stock, which is currently 

selling at $100 per share. A lower bound of $90 can be placed on the value of the portfolio 

by buying a protective put with exercise price $90. This protection, however, requires that the 

investor pay the put premium. To raise the money to pay for the put, the investor might write a 

call option, say, with exercise price $110. The call might sell for roughly the same price as the 

 Graph the profit and payoff diagrams for strips 

and straps. 

 CONCEPT CHECK 

20.4 

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Final PDF to printer

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696

P A R T   V I

  Options, Futures, and Other Derivatives

S

T

Payoff of Call

Payoff of Put

Payoff of Straddle

Payoff

Profit

X

X