It is the same payment when the price has risen to $115. Here we can see how the Collar position limits the upside potential of the underlying. Imagine an investor who owns 100 shares of a stock with a current share price of $5. An investor could build a necklace by buying a put with an exercise price of 3 $US and selling a call with a set price of 7 $US. The Collar would ensure that the profit of the portfolio will not be more than $2 and the loss will not be worse than $2 (before deduction of the net costs of the put option; that is, the cost of the put option minus what will be obtained for the sale of the call option). In the chart above, we see that below the sell exercise priceThe exercise pricethe exercise price is the price at which the option holder can exercise the option to buy or sell an underlying security, depending on (Kp) and above the call exercise price (Kc), the payment is flat. The potential for advantages and disadvantages of the portfolio is limited. It is only between strike prices that we see the payment movement of a collar position. Managing M&A Risk with Collars, Earn-outs, and CVRs, Caselli, S., Gatti, S., &Visconti, M.
(2006). Journal of Applied Corporate Finance, 18(4), 91-104. M&A transactions subject target shareholders and the bidder to many critical risks prior to the closing of the transaction and during the post-closing integration phase. The main risk prior to conclusion is the likelihood that fluctuations in the share prices of target bidders and bidders will influence the terms of the transaction and reduce the likelihood of closing the transaction. The main post-close risk for bidding shareholders is the lack of success in achieving the target, which could lead to overpayment. This article describes various useful tools for managing these risks, with many examples to illustrate pricing and tool structure. Bids with Collars can protect target shareholders from a drop in the price of the bidding company in the event of a pre-closing risk and acquirers have protection against excessive dilution. The cost of implementing Collar (Buy Put @ $77 &Write Call @ $87) is a net charge of $1.50/share. Perhaps the most striking collar of all is used with option strategies. Here, a collar includes a long position in an underlying stock with the simultaneous purchase of protection puts and the sale of call options against that stake. Trades and calls are the two options for exiting currency with the same month of expiration and must match the number of contracts. Technically, this collar strategy corresponds to a strategy of calling out of the currency with the purchase of an additional protection put.
This strategy is popular when an options broker likes to generate premium income from writing covered calls, but wants to protect the downward trend from a sharper-than-expected fall in the underlying security. . . .