A tactic to use if you hold underlying stock and are cautiously bullish about it. It functions similarly to a covered call and protected put combined in that it limits your upside potential by selling the stock if the stock rises above Leg 2
Alias
Risk-reversal
Description
Involves purchasing a protective put option and simultaneously selling a covered call option on the same underlying security. The goal of this strategy is to protect against a potential decline in the price of the underlying security while also generating income through the sale of the call option.
In a collar strategy, the strike price of the put option is typically set below the current market price of the underlying security, while the strike price of the call option is set above the current market price. This creates a “collar” around the current market price of the underlying security, which helps to limit the potential losses from a decline in the price of the underlying security.
Breakeven
the strike price of the call option minus the premium collected from selling the call option, plus the strike price of the put option minus the premium collected
Sweetspot
Stock price goes above Leg 3
Max profit
Limited to the premium received from selling the call option, minus the cost of the put option
Max Loss
UnLimited, as the value of the underlying asset could theoretically continue to decrease
