Collar Strategy is an extension to Covered Call Strategy. A trader, who is bullish in nature but has a very low risk appetite and wants to mitigate his risk will implement the Collar Strategy. Collar involves buying of stock in either Cash/Futures Market, buying an ATM Put Option & selling an OTM Call Option. The expiry dates of the op
This strategy is opposite of the Long Call Butterfly Strategy, a trader expects the market to remain range bound in Long Call Butterfly, but here he expects the market to move beyond strike boundaries in Short Call Butterfly. If the trader is bullish on the market’s volatility, he will implement this strategy. Here also there should be equal distance between the ..
Lower Break-even = Lower Strike Price + Net Premium, Upper Break-even = Higher Strike Price - Net Premium
THE COLLAR Vs SHORT CALL BUTTERFLY - When & How to use ?
THE COLLAR
SHORT CALL BUTTERFLY
Market View
Bullish
Neutral
When to use?
It should be used only in case where trader is certain about the bearish market view.
This strategy is meant for special scenarios where you foresee a lot of volatility in the market due to election results, budget, policy change, annual result announcements etc.
Lower Break-even = Lower Strike Price + Net Premium, Upper Break-even = Higher Strike Price - Net Premium
THE COLLAR Vs SHORT CALL BUTTERFLY - Risk & Reward
THE COLLAR
SHORT CALL BUTTERFLY
Maximum Profit Scenario
Strike Price of Short Call - Purchase Price of Underlying + Net Premium Received
The profit is limited to the net premium received.
Maximum Loss Scenario
Purchase Price of Underlying - Strike Price of Long Put - Net Premium Received
Higher strike price- Lower Strike Price - Net Premium
Risk
Limited
Limited
Reward
Limited
Limited
THE COLLAR Vs SHORT CALL BUTTERFLY - Strategy Pros & Cons
THE COLLAR
SHORT CALL BUTTERFLY
Similar Strategies
Call Spread, Bull Put Spread
Long Straddle, Long Call Butterfly
Disadvantage
• Limited profit. • A trader can book more profit without this strategy if the prices goes high.
• Limited rewards, usually offer smaller return. • Profitability depends on the significant movement of stocks and options prices.
Advantages
• This strategy protects the losses on underlying asset. • Risk gets limited if the price of the stocks goes down. • Trader can get ownership benefits life dividend and voting rights.
• Even if the market is highly volatile, the risk exposure remains limited. • Without any extra investment, you can receive your premium. • Able to book profits even when the price movement cannot be predicted.
