Collar Options Strategy | Short Collar | Examples | SBI | State Bank of India

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Collar Options Strategy
In our video on the Covered Call Options Strategy (the link to which has been provided in the description of this video) we discussed how the strategy offers no protection to the downside.
By adding one more leg to the Covered Call Options Strategy, that is, by buying a protective put (usually an OTM put) we would be able to cap the losses in case the underlying falls sharply.
It is actually a combination of two strategies - a Covered Call and a Protective Put.
A collar consists of owning a stock or futures contract, buying a put to protect the downside and selling a call to pay for the put. The call and put have the same expiration but sometimes a longer-dated (further out in time) put option is preferred.
The collar is one of the most used earning strategies because of its defined risk to the downside and limited reward to the upside. As earnings announcements and government economic reports are usually met with significant price reactions when the news is released a strategy with a limited risk to the downside is preferred.
The strategy is also used to protect gains when the price of the underlying is approaching strong support and resistance levels.
An example of how this can done on State Bank of India is given below:
Buy 1 lot of Futures at 194.85, Sell 1 lot of 210 Call at 13.05, Buy 1 lot of 170 Put 8.55, all have the same May 28 expiry. The current spot price of SBI is 192.90.
The risk graph shows the profit capped at ₹58950 and the loss capped at ₹61050. The break even point at expiry is at 190.35. Let’s know how to arrive at these numbers.
Net Premium = 210 Call Premium - 170 Put Premium = 13.05 - 8.55 = 4.5
Break Even Point = Futures Price - Net Premium = 194.85 - 4.5 = 190.35
Max Profit At Expiry = (Strike Price of Short Call - Futures Price + Net Premium) x Lot Size = (210 - 194.85 + 4.5) x 3000 = ₹58950
Max Loss At Expiry = (Futures Price - Strike Price of Long Put - Net Premium) x Lot Size = (194.85 - 170 - 4.5) x 3000 = ₹61050
A Collar is a bullish strategy and has a similar risk reward profile as a Bull Call Spread - a vertical spread strategy in which a call option with a lower strike price is bought, and another call option with a higher strike price is sold. One disadvantage of a Collar over the Bull Call Spread is you need to buy the underlying - whether stock or futures - at the outset which can be expensive.
If you are bearish on the underlying, you can opt for a Short Collar instead. That is, sell to open futures’ contract, buy to open an OTM call for protection and sell to open an OTM put to generate income. However we cannot replace the futures contract with a stock position in the short collar as a positional short position on the stocks is not allowed in the Indian market.
Also no adjustments have been suggested to the Collar as we consider it a set and forget strategy.
Thank you for watching! Please post any questions you have on this video in the comments section.