Series 7 practice questionmediumOptions — Collar Strategy
An investor owns 100 shares of XYZ at $50, buys 1 XYZ 45 put at $2, and writes 1 XYZ 55 call at $2. This strategy is known as a:
- AStraddle
- BStrangle
- CCollar✓ Correct answer
- DButterfly spread
Explanation
Why C — Collar
A collar combines a long stock position with a protective put and a covered call. The put provides downside protection (floor at $45), while the covered call generates premium to offset the put cost. In this case, the collar is established at zero cost since the premiums are equal ($2 each).
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