“A stock is currently trading at a price of $80. You decide to place a collar on this stock. You purchase a put option on the stock, with an exercise price of $75 and a premium of $3.50. You simultaneously sell a call option on the stock with the same maturity and the same premium as the put option. This call option has an exercise price of $90.” – R30 EOC #5 The answers to the questions on this collar assume you also have a position in the underlying. It doesn’t say in the question that you hold the underlying. Is it always the case that when buying a collar, you also hold the stock?
In the derivative section to contruct the collar includes owning the underlying. How you offset the potential loss of selling the call the the stock price skyrocketing is to own the underlying, so you are not selling the call “naked.”
In the Private Wealth section, the chapter on managing concentrated positions, the collar also assumes you own the underlying (i.e. it’s the concentrated position you are trying to hedge).
Then there are interest rate collars, which still assumes that you have some kind of underlying, like you own a floating rate bond and you construct a collar just in case interest rates drop and you don’t get paid enough on your floating coupon.