we know it is an option position with… long stock + long put + short call
but i dont get the point why
(a) long a put (with an exercise price below the current stock price) and
(b) short a call (with an exercise price above the current stock price)
But for max profit why is it not other way round for both…long puts are better with higher X and short calls are better with lower X compared to current stock price…
any views on this???
From the graph of a collar, the maximum payoff occurs if the stock price >= the call strike: the stock will be called away and the call writer will receive the call strike price.
In terms of the profit, you have some flexibility in setting the strike prices for the long put and the short call. Some look for a “cashless” collar (call premium received covers put premium paid), while some might even seek an income producing collar (call premium > put premium). If you set the strikes to be very close to the current stock price, you will have given away most of the potential upside to pay for significant downside protection. Regardless of how you set the strikes, there is a tradeoff to be made.
thanks…its more clear now…