A Collar, in the context of crypto institutional options trading, represents a risk management strategy combining the purchase of a put option and the sale of a call option, typically to hedge an existing long position in a cryptocurrency. Its primary purpose is to limit both the potential downside loss and the potential upside gain of the underlying asset. This defines a specific range of profitability and loss.
Mechanism
The structural components of a crypto options collar involve holding a long position in a digital asset, then buying an out-of-the-money put option and selling an out-of-the-money call option, both with the same expiration date. The put option establishes a floor price, protecting against significant drops in the asset’s value, while the sold call option caps potential gains but generates premium income to offset the put’s cost. The mechanism creates a bounded risk profile.
Methodology
The strategic approach behind implementing a collar is a defensive one, designed to protect unrealized gains or mitigate losses in a volatile crypto market. Investors typically construct a collar when they are moderately bullish on an asset but wish to reduce exposure to extreme price movements without liquidating their holdings. This methodology effectively defines a specific risk-reward corridor, providing certainty over a designated period.
Institutional hedging directly influences crypto option prices by systematically transmitting risk assessments into the market, shaping implied volatility and skew.
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