Difference between collar and bull spread

CFA Level III Derivatives
#1

Practice exam V#2 Exam 3 No29.

“a collar will provide downside protection if the ARS declines to a strike price below the current exchange rate and retain upside potential until ARS appreciates to a strike price above the current exchange rate…”

“…the purchase of 40-delta and sale of 30-delta puts are a put spread that provides downside protection below on strike price but no further protection if the ARS falls below a lower strike price…”

I am confused, in my opinion, collar and bull spread have exactly the same payoff diagram, am I right?

furthermore, I don’t understand the definition of 30-delta put and 40-delta put, is 30-delta-put=a put option with a delta of -0.3?..

#2

A collar is long stock, long put and short a higher call. It locks your gains between the put and the call.

A bull spread is a long ATM (50-delta) call and a short OTM (30/40 delta) call. You profit it it goes up to the 30 delta call.

Buying 40 delta puts and selling 30 delta puts is a bear spread, you want the price to call to the 30 delta put.

If a stock is at 100, a 40 delta put is just a put at a lower price, say 90, and a 30 delta put is lower, say 80.

#3

Wrong- diff payoff diagrams. Bull spread with calls doesn’t provide protection on down (you buy the lower call), out of money if price is below strike where buying a put would be in the money (downside protection); I’m only mentioning downside, not upside… Also delta basically illustrates how much out of the money the position is. Yes, a 30 delta (on a put) is -.3, negative aspect is removed when using a delta convention (ie- 30 delta put). A put out of money has a delta of about .5; also, a put with a delta of .3 is more out of the money than a put with a delta of .4. If I’m wrong with any of this, please weigh in. Good luck/ hope this helps.

#4

Spreads aren’t designed as protection strategies, they’re directional profit strategies w/ limited upside.

As the names imply:

Bull Spread: You’re bullish on the underlying. To profit from this viewpoint you would need to buy a lower strike call and sell a higher strike call. Max profit occurs when the underlying closes exactly at the short call’s strike price.

Bear Spread: You’re bearish on the underlying. With calls you would need to buy a higher strike call and sell a lower strike call. Your max profit occurs when both calls expire out of the money. Profit is premium received less premium paid. The higher call acts as an insurance policy in case the market increases versus the expected decline.

#5

Thanks I think I get it now. buy 40 put sale 30 put actually is bear put spread(it is long high put and short low put), it profits on the bearish of the underlying.

The payoff diagram are different, because spread stategy did not include long position in underlying, while the collar has. Therefore when the low call is OTM, the underlying will still suffer loss, then no downside protection.

Thank you so much Moleary, Cross-ied and Chuckrox8. : D