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Collar

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Collar
The simultaneous sale of an Out-of-the-money call and purchase of an Out-of-the-money put (or Cap and floor in the case of Interest rate options). The Premium from selling the call reduces the cost of purchasing the put. The amount saved depends on the strike rate of the two options. If the Premium raised by the sale of the call exactly matches the cost of the put, the strategy is known as a Zero cost collar. The combination of purchasing the put and selling the call while holding the Underlying protects the Holder from losses if the Underlying falls in price, at the Expense of giving away potential upside.

See also Cap, Equity collar, impact Forward, Risk Reversal, Zero cost option
Posted by  Privatebanking.com
 
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