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The Reverse Collar is a hedge strategy that protects a position from a decline. The downside of using this protection is that the potential profits of the position on the upside are reduced.
As with the Collar Option Strategy, this strategy involves buying and selling puts and calls with the same expiration date but different strike prices. In order to create a reverse collar strategy, an option trader must buy calls and sell puts.
You hold 100 shares of a stock. You are bullish on that stock, but you would like to buy a protection against the stock's decline.
To establish a reverse-collar strategy, let us say you buy one call with a strike price of $200 at $2.5 and sell one put with a strike price of $180 at $2.75. This options strategy results in a credit of a $0.25. In this case, the strategy's breakeven is calculated by subtracting the credit from the put strike. When the strategy results in a debit, the breakeven is calculated by adding the debit to the call strike.
The maximum profit is unlimited above the call strike ($200) and equal to the credit ($0.25) when the stock price is between the call strike and the put strike.
The maximum loss is equal to the put strike minus the credit ($180 - $0.25 = $179.75) if the stock price is below the put strike and equal to the debit if the stock price ends between the strikes at the option expirations (In the current example the maximum loss would be equal to zero because the strategy generates a credit).
This item downloads Reverse Collar option combinations, for U.S. options, from the avasaram.com's Reverse Collar Screener.
The data is stored in a custom database "options_reversecollar". The database contains 18 fields. The fields' description is almost the same as with Collar Option Strategy. The difference is that in the collar strategy, the long option is a put and the short option is a call, while in the reverse collar option, the long option is a call and the short option is a put.