Stock Option Return - Collar Return

Collar Return

The collar (finance) is a neutral-to-bullish strategy and consists of a combination of a covered call (see above) and a long put option for protection. The protective put provides insurance to guarantee a floor on the potential loss, but the protective put option also reduces the amount of potential return. The collar is useful for reducing or delaying taxes for large stock positions which otherwise would need to be sold in order to diversify, reduce risk, etc. The following calculation assumes the sold call option and the purchased put option are both out-of-the-money and the price of the stock at expiration is the same as at entry:

%If Unchanged Potential Return = (call option price - put option price) /

For example, for stock JKH purchased at $52.5, a call option sold for $2.00 with a strike price of $55 and a put option purchased for $0.50 with a strike price of $50, the %If Unchanged Return for the collar would be:

%If Unchanged Potential Return = (2-0.5)/= 2.9%

The break-even point is the stock purchase price minus the net of the call option price and the put option price.

Break-even = $52.5 - ($2.00 - $0.50) = $51.00

As long as the price of the JKH stock is greater than $51 at stock option expiration, the position will be profitable.

The percent maximum loss is the difference between the break-even price and the strike price of the purchased put option divided by the net investment, for example for JKH:

%Max loss = (51 - 50)/ = 2%