Strategies

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Equity Collar

 

XYX is below $40 at expiration

If XYX is trading below $40 at expiration, the investor will have the right to exercise the put options and sell the shares at the strike price of $40. This represents the worst-case scenario, and the investor will have to absorb a loss of $4.75 per share (the difference between the stock price of $44.75 when the position initiated and the selling price of $40) and a loss of $0.25 per share, which represents the cost of the collar. The total downside risk, therefore, is $5.00 per share.

Note: If, prior to expiration, the investor decides to keep the shares, the put could be sold. The proceeds from the sale of the put would partially offset the accrued loss on the stock.


 
 

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