What is a collar option strategy? When to use it?

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A collar is an options trading strategy that is used when you are holding shares of a company and want to protect it from any sharp drop in prices. It involves buying a Put and selling a Call Option.

Max Loss = Purchase Price of Underlying - Strike Price of Long Put - Net Premium Received

Max Profit = Strike Price of Short Call - Purchase Price of Underlying + Net Premium Received

Suppose you are holding 250 shares of TCS currently trading at Rs 3495. So your collar option strategy would involve buying 1 TCS 3450 Put and selling 1 TCS 3550 Call.

If the price rises to Rs 3550, your holding shares value increase and you will lose net premiums. However, if the price falls to Rs 3450, you will lose the value of your holdings but will benefit from exercising the Put option.

Collar Option Strategy Payoff Graph