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This strategy is often used to hedge against the risk of loss on a long stock position or an entire equity portfolio by using index options. It can also be used to hedge interest rate movements by both borrowers and lenders by using caps and floors. Protective collars are considered a bearish-to-neutral strategy. The loss in a protective collar is limited, but so is the potential upside.
Put options give purchasers the right, but not the obligation, to sell the stock at the strike price. The premium, which is the cost of the options from the call sale, is applied toward the put purchase, thus reducing the overall premium paid for the position. Considering recent market volatility, Jack is uncertain about the future direction of XYZ shares, so we can say that he is neutral to bearish.
But he is not sure, so he is going to hang in there and enter into a collar to hedge his position. The mechanics of this strategy would be for Jack to purchase one out-of-the-money put contract and sell one out-of-the-money call contract, as each option represents shares of the underlying stock. Jack feels that once the year is over, there will be less uncertainty in the market, and he would like to collar his position through year-end.
To accomplish his objective, Jack decides on a January option collar. Jack's transaction is:. But let's look at the three possible outcomes for Jack once January arrives:. As opposed to collaring positions individually, some investors look to index options to protect an entire portfolio. When using index options to hedge a portfolio, the numbers work a bit differently but the concept is the same. You are buying the put to protect profits and selling the call to offset the cost of the put.
The bullish collar involves the simultaneous purchase of an out-of-the-money call option and sale of an out-of-the-money put option. Being long the call protects a trader from missing out on an unexpected increase in the stock price, with the sale of the put offsetting the cost of the call and possibly facilitating a purchase at the desired lower price.
The possible outcomes at expiration would be:. Less widely discussed are collars designed to manage the type of interest rate exposure present in adjustable-rate mortgages ARMs. This situation involves two groups with opposing risks. The lender runs the risk of interest rates declining and causing a drop in profits. The borrower runs the risk of interest rates increasing, which will increase his or her loan payments.
OTC derivative instruments, which resemble calls and puts, are referred to as caps and floors. Interest rate caps are contracts that set an upper limit on the interest a borrower would pay on a floating-rate loan. Interest rate floors are similar to caps in the way that puts compare to calls: They protect the holder from interest rate declines.
End users can trade floors and caps to construct a protective collar, which is similar to what Jack did to protect his investment in XYZ. In summary, these strategies are only two of many that fall under the heading of collars. Other types of collar strategies exist, and they vary in difficulty. The - before the 7 indicates that the Colts were the point spread favorites.
If one were to bet on the Colts, the Colts would have to win by a total of 8 points for the bettor to win. If one were to bet on the Bears, the Bears would have to win outright or lose by no less than 6 points for the bettor to win. A 7 point victory by the Colts would equal a push or tie. Are you new to Sports Betting? If you are or, if you just want to try betting an unfamiliar sport, here are some guides to help you out! What is a Point Spread or Side Bet?
Steve Petrella. Download App. What Is a Point Spread? Click a section to jump ahead. Point Spread Definition 2. Point Spread Examples, How it Works 3. What Does Mean Next to the Spread? A minus sign - means that team is the favorite. The Buckeyes need to win by 7 points or more for their bettors to win. Read now. Top Offers. Bet Over 0 in Lakers-Nuggets.
Follow Us On Social. Sportsbook Reviews. Sports Betting Calculators. How to Bet On Sports. Against the spread ATS wagering is part of the standard big three betting options, which also includes moneylines and totals. Points spreads are a popular gambling choice in pro and college football as well as basketball. LSU That means LSU needed to not only beat Clemson, but win by more than 5.
Bettors who wagered on LSU easily covered the spread because the Tigers won by If the Lakers won by exactly six points, the bet would be ruled a push and whatever money was wagered would be returned to the bettor. Many bettors like betting spreads because they either get a better return on their investment wagering on a favorite or because they like the underdog to keep the game close but not necessarily win.
Betting on the Vikings to win outright as a three-point favorite would likely come at the cost of odds as opposed to Heinicke threw for yards and a touchdown in Washington's Wild Card loss to the Buccaneers in January. Wheeler was arrested on Jan. Jimmy Butler had an Oscar-worthy performance against the Knicks. Home Gambling. Gambling Covering The Spread.