Collar Buy Cap Sell Floor

A collar is an options trading strategy that is constructed by holding shares of the underlying stock while simultaneously buying protective puts and selling call options against that holding.

Collar buy cap sell floor. An interest rate floor is an agreed upon rate in the lower range of rates associated with a floating rate loan product. Break even point 80 1 50 81 50 share. You can think of a collar as simultaneously running a protective put and a covered call. A collar is created by.

A collar creates a band within which the buyer s effective interest rate fluctuates a reverse interest rate collaris the simultaneous purchase of an interest rate floor and simultaneously selling an interest rate cap. Some investors think this is a sexy trade because the covered call helps to pay for the protective put. So you ve limited the downside on the stock for less than it would cost to buy a put alone but there s a tradeoff. The purchase of the cap protects against rising rates while the sale of the floor generates premium income.

A common motivation for an organization to sell a floor is to raise cash to purchase a cap which creates an interest rate collar which bounds the organization s variable rate debt by the chosen cap and floor rates. Capped floater floater minus cap. Buying the underlying asset buying a put option at strike price x called the floor selling a call option at strike price x a called the cap. Interest rate floors are utilized in derivative.

The maximum profit is 15 500 or 10 contracts x 100. Imagine buying a 1 70 libor cap and selling a 1 70 floor. The puts and the calls are both out of the money options having the same expiration month and must be equal in number of contracts. Cost to implement collar buy put 77 write call 87 is a net debit of 1 50 share.

The call you sell caps the upside. As stated before a collar establishes a defined range floor and cap of interest rates the hedger is subjected to as opposed to a single fixed swap rate. What have you got.