Collar Trades represent a risk management strategy in options trading, specifically applied to a long position in an underlying cryptocurrency. This strategy simultaneously limits both potential losses and potential gains over a defined period. It functions as a protective measure for investors holding digital assets.
Mechanism
A collar is constructed by combining three positions: owning the underlying cryptocurrency, purchasing an out-of-the-money put option, and selling an out-of-the-money call option. The put option establishes a floor for potential losses, while the sold call option caps potential gains. The premium received from selling the call helps offset the cost of buying the put, making it a cost-efficient hedge.
Methodology
This strategic approach is typically used by institutional investors to protect accumulated profits on a cryptocurrency holding or to reduce the cost basis of their position. It provides a defined risk-reward profile, balancing capital preservation against limited upside participation. The methodology aids in managing market volatility for long-term holders of digital assets.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
