Looking at the collar in the stagnant scenario, the future
options price would be unchanged thus neutral in terms of return.
Therefore, the potential profit or loss would come strictly
from the debit or credit of the two options.
If the future options
does not move, as in our example, both
the put and call would finish out-of-the-money and be worthless.
Our profit or loss would simply be calculated from whether you
paid for the collar or collected from the collar and how much
that amount was.
Using the same prices as the previous example (the future options
purchase price of $28.00, the Dec. 27.5 put $1.00 and the Dec
30 call $1.00) we will now take a look at the down scenario.
Lets set the future options price at $28.00 on expiration.
At this price both the Dec. 27.5 put and the Dec. 30 call are
out-of-the money and worthless. Since there is no credit or
debit incurred in the option position ($1.00 inflow from the
calls, $1.00 outflow from puts) the total return of the position
is simply the gain or loss from the future options.
With the future options purchase price of $28.50 and a future
options price of $28.00 on expiration, there will be a $ .50
loss in the position. Setting the future options price at $27.50,
we see that the Dec. 27.50 puts and the Dec. 30 calls are again
worthless and with no debit or credit incurred, the positions
profit or loss will come down to the gain or loss on the future
With the purchase price of the future options being $28.50 and
the future options price at expiration $27.50, there will be
a $1.00 loss. In this case, we have reached the maximum loss.
No matter how low the future options go, you can only incur
a maximum loss of $1.00.
Now, lets set the future options
price at $26.00 and see if
this holds true. With the future options at $26.00 on expiration,
the Dec. 30 calls are out-of-the-money and worthless. The Dec.
27.5 puts, however, are in-the-money and now worth $1.50.
The future options you purchased for $28.50 is now worth $26.00
on expiration which is a $2.50 loss. Combining the $2.50 future
options loss with the $1.50 gain in the puts and you have a
$1.00 loss in the overall position.
This demonstrates that $1.00 is the maximum loss of the position.
Keep in mind that if the future options position creates a debit
or a credit, it must be added to, or subtracted from the future
Most of the time, there will be a small debit or credit incurred
in the option position. It is relatively infrequent that the
put and call used in the collar are trading at the exact same