"Collar" Strategy - Payoff of ITM Collar?

[mrx333]

Hello all,

I am familiar with the operation and payoff of the traditional "Collar" strategy. I refer to the traditional collar as an "OTM Collar" (because you are buying an OTM put and selling an OTM call).

However, I was wondering what is the payoff of an "ITM Collar"? (buy an ITM put and sell ITM call)

For example, I know the payoff of a traditional (OTM) Collar looks something like:

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(please excuse poor graphic drawing)
(I have edited this message by uploading an Excel spreadsheet with a typical OTM Collar payoff graph - better than above text graphic)

I have searched all over and I cannot find a graph/chart anywhere that talks about an ITM Collar strategy.

I have tried to map it out in Excel, but I don't know if I am calculating the options correctly.

This forum is the only place where I am confident this question can be answered accurately.

Thanks for your help in advance.

 

[Windlesham1]

You will get called away,or have to roll, and the commissions on small volume make the 'collar' a waste of time. Don't buy stock!

 

[Robertral]

x

 

[Robertral]

Your payoff diagram is wrong for a start....what u have plotted there is a long call spread.....see attached for an OTM long put and a short OTM call....

As the strikes tends towards the ATM strike, then the payoff will tend towards that of the underlying (a synthetic forward).

For ITM (why ever would u do this) you get a gradient of -1 for S<K1 and a -2 grad for K1<S<K2 and a -1 grad for S>K2

For sheet jsut change yellow boxes...i.e strike (mess with OTM ATM and ITM) and size (if u want to change size for some reason)

 

[mrx333]

Thank you all for the replies. Robertral, thank you for the spreadsheet.

One thing I don't understand is how I was wrong about the (OTM) Collar payout (maybe my spreadsheet got messed up in the upload)

I got my payoff information from "http://www.optionsxpress.com/educate/strategies/collar.aspx"

I don't use that site to trade options, but I have used it to examine the different types of options strategies.

If you get a chance, please take a look at the above link and tell me if that payoff diagram is wrong for a Collar.

Basically, I was wondering if you did an "ITM Collar", if the payoff would kinda look like the mirror image of a regular (OTM) Collar. And therefore by comining the 2 strategies, you would get a flat payoff (albeit, maybe a negative payoff).

I guess this strategy would be similar (although not the same!) as a Reversal or Conversion (also listed on the link above).

Anyone, let me know what you think about this. Thanks.

 

[jafa]

Hey guys,

Mr x333,

Firstly, your payoff diagramm was not wrong. What robertral hasn't inluded is the long stock in his calcs.

The payoff diagram of a collar ( long stock, short OTM call, long OTM put) IS THE SAME as a bull vertical spread (debit or credit)

The ITM "collar" that you asked about will give you the same payoff diagram as a BEAR vertical spread.

You would end up with a synthetic box spread by combining the two....same result though, as conversion or reversal.

 

[mrx333]

Thanks jafa for the reply and update!