Series 7 practice questionhardOptions — Collar Calculation
An investor owns 100 shares of DEF at $80, buys 1 DEF 75 put at $3, and writes 1 DEF 85 call at $3. What is the maximum profit and maximum loss on this collar?
- AMax profit $500, max loss $500✓ Correct answer
- BMax profit $800, max loss $300
- CMax profit $500, max loss $800
- DMax profit $300, max loss $500
Explanation
Why A — Max profit $500, max loss $500
This is a zero-cost collar (premiums cancel out). Maximum profit occurs if stock rises to $85 (called away): $85 - $80 = $5 per share = $500. Maximum loss occurs if stock falls to $75 (put exercised): $80 - $75 = $5 per share = $500. The net premium is zero, so it does not affect the calculation.
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