Zero Cost Collar

[moka2]

I have a question about Zero cost or cost less collar
Fundamentally it can be used to Freeze your profits or loss for a period

I understand it when applied to a long position but get confused when applied to a underlying short Position
Short Position

Example You are Short ES @ 2000
Es goes up by 20 Pts to 2020 so loss on position 20pts
Execute a AT the Money collar ( don't ask the reason why ATM) costing 3-4 pts
Sell 2020 PUT and Purchase 2020 Call

IF ES then goes further to 2050

SO total move = 50 pts

What would be my situation? at expiry?

 

[mb325]

You lose 50pts on your futures position.

By selling puts to buy calls you create a synthetic long position. On expiry the puts you are short are worthless and the calls you are long are 30pts in the money. Net profit on that position, assuming you paid 3, would be 30-3 = 27pts.

Total loss is 50 - 27 = 23pts.

This is all assuming you have traded the correct amount of options to hedge the position.