Collar doesn't involve leverage? purchase, involve, option

krause2

2007 Morning answers imply that collars ( which involve sale and purchase of options ) do not involve leverage.

I thought option or futures were leveraged instruments, no?


got fooled

oneboy

With a collar you hold the underlier plus a bull spread hence no leverage. A bull spread standalone does use leverage. Agree?

bkballa

you sell a call, buy a call. you get less for the sell piece than what you spend the buy piece ... wouldn't call that leverage. just a negative investment position. you need not necessarily borrow.

CP

pennyless

A collar is fully collateralized by the underlier position.

Zestt

Ok I buy that. Thanks

Iginla2011

jbaphna Wrote:
-------------------------------------------------------
> With a collar you hold the underlier plus a bull
> spread hence no leverage. A bull spread standalone
> does use leverage. Agree?


I thought a collar was a protective put + covered call

a bull spread is two calls or two puts

no?

wake2000

Z
>
>
> I thought a collar was a protective put + covered
> call
>
> a bull spread is two calls or two puts
>
> no?

Yes you are correct. Collar is protective put + covered call + underlying stock.

But the Collar payoff diagram = Bull spread payoff diagram.

That is what he meant to say.

strikethree

There is also a concept of 'no cost collar' or 'zero cost collar', where the two options entered into have exactly the same premium and hence net to zero. Note that when doing this, you do not have full control of where the strikes are as you are constrained to finding two options with same/similar premiums.