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Protective Collar Follow Along Worksheet Exercise
Protective Collar Follow Along Worksheet Exercise
Follow Along
Section 9: Protective Collar Combination
The stock is MRK and the trade date is December 11, 2017. The stock at the time is
$56.34 and I am long MRK at $50. So I have a nice gain in the stock already so I
want to put a protective collar on it because I am worried about MRK falling. I will
do this by selling one of the MAR 57.5 Calls and I will collect $1.45 for this.
Simultaneously, I will buy one of the MAR 52.5 Puts and I will spend $.97. It is a net
credit of $.48 so I will receive that in my account for this protective collar. Looking
at the PNL graph, you are not noticing much on the PNL for MRK. Then you see a
big gap up in MRK and it looks like we start to lose money based on this structure.
But remember I told you I am long 100 shares of stock. So the PNL that we are
losing on the structure we are actually making on the long stock so don't worry
about that. Then you start to see the PNL of the structure start to lift and that is as
MRK comes back in line. MRK eventually starts to settle around $54.63. Looking at
the PNL of our structure, we are actually making a little bit of money because MRK
settled between the strikes 57.5 and 52.5. So there is no right to sell stock or
exercise my put and there is also no obligation to sell stock because of my call that
I am short. This is due to MRK at expiration settling below 57.5.
Protective Collar Combination
Sell: 1 MRK
Expiration: MAR
Strike Price: 57.5 Call
Fo r m u l a s
Max Profit if Net Call Strike - Stock Purchase Price - Net
Debit Premium Paid
Max Loss
Max Gain
Breakeven
MRK Price at
Expiry
Net Result