10 Collars and Synthetic Stock

You can bring tremendous flexibility to your hedging program by using several different strategies. Some will be designed to generate income; the covered call, uncovered put, and covered straddle are examples. Others, like the butterfly and condor, are more defensive, representing an exchange of limits—limited profit potential in exchange for limited loss exposure.

The selection of the right strategy relies on the volatility in the stocks you own as well as in the overall market. This chapter describes several hedges consisting of spread positions, all designed to accomplish a hedging advantage and all with effectiveness based on price volatility.

The Collar

One strategy designed to set up conditional exercise of ...

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