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

Question

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

Quizplus · Accepted Answer

A zero-cost collar option strategy involves buying a put option (strike price X₁) and selling a call option (strike price X₂) with the proceeds from the call option covering the cost of the put option. If the terminal stock price is between the two strike prices, the options expire worthless, and the profit remains zero, as the initial net cost of the strategy is zero.

The Profit from a Zero-Cost Collar Option Strategy When the Terminal