Usage Scenario

The short collar strategy is commonly used in scenarios where short positions are held to hedge against upward risks.

How to build

The short collar strategy consists of three transactions: an underlying asset transaction and two options transactions:

● Selling original shares (holding short positions in stocks)

● Purchase call

● Sell put

Call and put are different except for the exercise price. The underlying asset, expiration date, and quantity are the same, and the number of shares corresponding to the option is the same as the number of underlying shares held.

Strategy brief

The short collar strategy is to short sell the underlying asset while selecting a buy call to hedge against possible upward risks, and then offset some of the cost of the purchase call through selling put revenue, thus achieving the goal of hedging the risk with a lower cost.

If you only look at the first two transactions — a buy call to hedge against the upward risk of holding short positions — it's actually a protective call option strategy.

Selling one more put on this strategy is a short lead strategy. If the stock price moves in the short term as expected, it can increase one share of revenue.

If you only look at the first and third trades — holding a short position and selling a put at the same time — this is a strategy to reserve a put option.

Buying one more call on this strategy is a bearish collar strategy.

If the stock rises to a certain extent as expected, it is possible to add some profit to the profit of the put option preparation strategy.

The short collar strategy is a strategy where profits and losses are limited, so it is also called a double limit combination of bears.

If the underlying asset rises, the buy call portion can limit losses, but if the underlying asset falls sharply, the sell put portion will also limit the overall profit margin.

It is worth noting that since short selling stocks requires interest, the scope and number of targets are limited. In actual stock market transactions, ordinary investors rarely use this strategy, and institutional investors and futures markets are quite common.

Risks and benefits

● Break-even point

Stock price = stock selling price+net option premium

● Maximum profit

Maximum profit = call's exercise price - stock selling price+net option premium

● Maximum loss

The biggest loss is net option premium

Examples of calculations

Assuming that in the US stock market, TUTU's current stock price is 60 US dollars. You are bearish on TUTU's future market, so they sold 100 shares of TUTU, but they are also worried about the short-term rise in stock prices. In order to hedge against risks, they have constructed a bearish collar strategy:

Sell 100 TUTU shares for 60 US dollars each;

Sell 1 put with an exercise price of 55 US dollars at a price of 6 US dollars;

Buy 1 call with an exercise price of $65 at a price of $8;

At maturity, your earnings will be as follows:

Explanation:

1. The article uses stocks as option targets to explain strategies. The actual investment bid can also be stock indices, futures contracts, bonds, currencies, etc.;

2. Unless otherwise specified, all options in this article refer to on-market options;

3. The TUTU company in the article is a virtual company;

4. The relevant calculations in this article do not take into account handling fees. In actual options investment, investors need to consider transaction costs.