Collar Strategy: Hedging Long Stock with Long Put and Short Call
An executive holds 1,000 shares of concentrated stock currently trading at $100 per share. Seeking to lock in gains and protect against downside risk without paying significant out-of-pocket premium cash, the executive buys 10 $90 Put contracts and sells 10 $110 Call contracts. What options strategy has the executive executed, and what is its financial effect?
A collar consists of Long Stock + Long Out-of-the-Money Put + Short Out-of-the-Money Call. It provides downside protection funded by selling upside potential.
Complete Analysis & Legal Rationale
A collar is a conservative hedging strategy combining long stock with a long put (downside floor) and a short call (upside ceiling). By selling an out-of-the-money call (at $110), the investor generates premium income that offsets or completely pays for the purchase of the out-of-the-money protective put (at $90). The downside loss is limited below $90, while upside appreciation is capped at $110. When the put premium equals the call premium, it is known as a 'cashless' or 'zero-cost' collar.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
A straddle combines a put and call on the same stock with the SAME strike and expiration, without owning underlying shares.
Long stock + long put + short call defines a collar, bracketing outcomes between the two strike prices.
A bull call spread consists of two calls with no underlying equity ownership required.
A ratio put write involves selling more puts than purchased, creating naked put risk, which is the opposite of this position.
Official Standard: Governs collar margin requirements and defines combinations of long stock, long puts, and short calls.