Index XYZ is between strike prices of 95 and 105 at expiration
XYZ Index at 100
Buy 100 XYZ 95 Puts at $0.60
Sell 100 XYZ 105 Calls at $0.80
If index XYZ either declines or increases less than 5%, and therefore closes at expiration between the put strike price of $95 and the call strike price of $105, both the calls and the puts would expire out-of-the-money and with no value. The investor could expect a drop in portfolio value of less than the tolerable 5% with a decline in XYZ, or an increase in value of less than 5% if XYZ had gone up. In either case, the $2,000 credit received form establishing the collar is the investor’s to keep. This credit would either partially offset a loss in portfolio value by $2,000, or add $2,000 to any increase in portfolio value on the upside. If the collar had been originally established at a net debit, this would instead add to any loss or reduce any profit by the total debit amount.