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Collar Construction

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Autor:   •  July 9, 2018  •  Case Study  •  817 Words (4 Pages)  •  36 Views

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A collar is the purchase of a put and the sale of a call with a higher strike price, with both options having the same underlying asset and the same expiration date.

According to the historical data, the stock price BABA is in a decreasing trend and we adopt a collar strategy of buying a put option and selling a call option.

Step 1: The strike price of purchased put option is $170, and strike price of sold call option is $210.

Step 2: Calculate the payoffs of purchased put option, which is max (0, $170 – stock price). The payoff of sold call option is negative max (stock price - $210, 0).

Step 3: The premiums of put option and call option are respectively $10.39 and $9.7. Hence, the revenues of premiums and interest are($10.39-$9.7)*(1+2.80%)^0.5=$0.8054

Step 4: The total profit of collar strategy the payoffs of purchased put option, sold call option and premiums with interest.

Collars are frequently used to implement insurance strategies—for example, by buying a collar when we own the stock. This position, which we will call a collared stock, entails buying the stock, buying a put, and selling a call. It is an insured position because we own the asset and buy a put. The sale of a call helps to pay for the purchase of the put. When we purchase a collar which can help us to reduce the risk of decrease in price.

Bull Spread

A bull call spread is a limited profit, limited risk options trading strategy that is similar to a bear call. The difference is that it profits from a moderate increase of price of the underlying security. It is constructed by buying a call with a lower strike price, and short another call option with a higher strike price.

Step 1: Purchase a call option with a strike price of $185 and sell a call option with a strike price of $195.

Step 2: Calculate the payoffs of purchased call option, which is max (0, stock price – $185). The payoff of sold call option is negative max (stock price - $195, 0).

Step 3: The premiums of purchased call option and sold call option are respectively $19.36 and $15.00 Hence, the revenues of premiums and interest are (-$19.36+$15.00)*(1+2.80%)^0.5=-$4.42

Step 4: The total profit of bull spread strategy the payoffs of purchased call option, sold call option and premiums with interest.

By constructing bull call spread, investors can effectively reduce option premium costs in the cost of limited profit.

Bear Spread

A bear call spread is a limited profit, limited risk options trading strategy that is designed for trading on a bearish underlying stock. It is created by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying security with the same expiration date.

Step 1: Purchase a call option with a strike price of $195, and

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