Collar Buy Cap Sell Floor

These option products can be used to establish maximum cap or minimum floor rates or a combination of the two which is referred to as a collar structure.

Collar buy cap sell floor.

The purchase of the cap protects against rising rates while the sale of the floor generates premium income. A collar is an options trading strategy that is constructed by holding shares of the underlying stock while simultaneously buying protective puts and selling call options against that holding. The maximum profit is 15 500 or 10 contracts x 100. Interest rate floors are utilized in derivative.

Interest rate caps floors and collars interest rate caps floors and collars are option based interest rate risk management products. So you ve limited the downside on the stock for less than it would cost to buy a put alone but there s a tradeoff. A collar is created by. Some investors think this is a sexy trade because the covered call helps to pay for the protective put.

Caps floors and collars 3 capped floater consider the net position of the issuer of 100 par of a floating rate note who either buys a matching cap from a dealer or else embeds the cap in the note at issue. You can think of a collar as simultaneously running a protective put and a covered call. A common motivation for an organization to sell a floor is to raise cash to purchase a cap which creates an interest rate collar which bounds the organization s variable rate debt by the chosen cap and floor rates. An interest rate floor is an agreed upon rate in the lower range of rates associated with a floating rate loan product.

Capped floater floater minus cap. A collar creates a band within which the buyer s effective interest rate fluctuates a reverse interest rate collaris the simultaneous purchase of an interest rate floor and simultaneously selling an interest rate cap. Buying the underlying asset buying a put option at strike price x called the floor selling a call option at strike price x a called the cap. What have you got.

The call you sell caps the upside. Cost to implement collar buy put 77 write call 87 is a net debit of 1 50 share. The puts and the calls are both out of the money options having the same expiration month and must be equal in number of contracts.