What does collar option strategy means and when we should use it ?

If you own shares of a company and need to protect them from any sharp declines in price, a collar can be used. It involves the sale of a Call Option and purchasing a Put.

Maximum Loss = Purchase of Underlying-Strike Price of Long Term Put - Net Premium

Maximum Profit is equals to :                              Strike Prices ( of Short Calls) - Purchase Price (for Underlying) + Net Premium Received

Imagine that you own 250 shares of TCS at Rs 3495. The collar option strategy for you would be to purchase 1 TCS 3450 put and 1 TCS3550 call.

Your holdings will appreciate in value and you will lose your net premiums if the price reaches Rs 3550. You will still be able to benefit from the Put option, even if the price drops below Rs 3450.

Collar Option Strategy Payoff Graph