What is a collar strategy payoff diagram?

The collar strategy payoff diagram has a defined maximum profit and loss. Shares of the underlying asset may be sold at the short call strike price or the long put strike price if the option is in-the-money at expiration. If the stock is between the two levels at expiration, both the call and put options will expire worthless.

What is a payoff diagram?

Thank you! Payoff diagrams are a way of depicting what an option or set of options or options combined with other securities are worth at option expiration. What you do is you plot it based on the value of the underlying stock price.

What is the payoff profile of collar vs vertical spreads?

Collar has similar payoff profile to bullish vertical spreads, namely bull call spread (long lower strike call + short higher strike call) and bull put spread (long lower strike put + short higher strike put).

How do collar options work?

To initiate the collar strategy, a call is sold above the stock price and a put is purchased below the stock price. Both options will have the same amount of contracts and expiration dates. Collars may be costless or entered for a credit or debit, depending on the strike price of the short call and long put options.