A Collar Strategy is a sophisticated options trading technique designed to simultaneously limit both the potential gains and potential losses on an underlying asset, typically employed by investors seeking to protect an existing long position in a volatile asset like a cryptocurrency.
Mechanism
This strategy is constructed by holding a long position in the underlying crypto, purchasing an out-of-the-money put option to establish a price floor (downside protection), and concurrently selling an out-of-the-money call option to cap potential upside gains. The premium received from selling the call partially or fully offsets the cost of buying the put, thereby creating a defined risk-reward profile within a specific price range.
Methodology
Within crypto institutional options trading, a collar represents a tactical risk management framework, enabling investors to hedge against significant downturns in a digital asset while financing a portion of that hedge through capped upside participation. This methodological approach provides a disciplined means for capital preservation and managing portfolio volatility over a defined period, balancing protection with cost efficiency in dynamic crypto markets.
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