A risk management strategy in institutional crypto options trading designed to limit both the potential gain and potential loss on an underlying asset. This approach establishes a defined profit range while protecting against significant downward price movements.
Mechanism
A collar is constructed by holding a long position in an asset, simultaneously purchasing an out-of-the-money put option to set a price floor, and selling an out-of-the-money call option to offset the cost of the put and cap upside gains. This creates a cost-effective protection structure.
Methodology
This hedging technique is employed by investors seeking to mitigate downside risk on their cryptocurrency holdings, particularly in volatile market conditions, while reducing the overall cost of protection by sacrificing some potential upward price movement. It provides a structured risk-reward profile for asset exposure.
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