The profit from a collar option strategy when the terminal stock price ends up in between the two strike prices is S_T - S₀ - P₁ + C₂ where X₂ X₁.

Question

The profit from a collar option strategy when the terminal stock price ends up in between the two strike prices is S_T - S₀ - P₁ + C₂ where X₂ > X₁.

Quizplus · Accepted Answer

This formula represents the profit from a collar option strategy, which involves buying a call option at a higher strike price (S1U1B1) and selling a put option at a lower strike price (S1U1B10), with the intention of protecting against a downward movement in the stock price. If the stock price ends up between these two strike prices (i.e. XS1U1B12S1U1B0 > XS1U1B11S1U1B0), the call option will be exercised and the put option will expire worthless, resulting in a profit equal to the difference between the call option payoff (SS1U1B1TS1U1B0) and the put option premium received (PS1U1B11S1U1B0) minus the cost of the options (CS1U1B12S1U1B0).

The Profit from a Collar Option Strategy When the Terminal