Are the last two paras. below correct? Shouldn't they be reversed?
Isn't your maximum profit when $P \le 77$? Then you can exercise your 77P, but the call holder can't exercise his 97C. Your profit $= 77 - P -$ options premiums.
Isn't your maximum loss when $P \ge 97$? Then you can'texercise your 77P, but the call holder can exercise his 97C. Your loss $= P - 97 +$ options premiums.
Assume an investor is long 1,000 shares of stock ABC at a price of \$80 per share, and the stock is currently trading at \$87 per share. The investor wants to temporarily hedge the position due to the increase in the overall market's volatility.
The investor purchases 10 put options (one option contract is 100 shares) with a strike price of \$77 and writes 10 call options with a strike price of \$97.
Cost to implement collar (Buy Put @ \$77 & write Call @ \$87) is a net debit of \$1.50 / share.
Break even point = \$80 + \$1.50 = \$81.50 / share.
The maximum profit is \$15,500, or 10 contracts x 100 shares x ((\$97 - \$1.50) - \$80). This scenario occurs if the stock prices goes to \$97 or above.
Conversely, the maximum loss is \$4,500, or 10 x 100 x (\$80 - (\$77 - \$1.50)). This scenario occurs if the stock price drops to \$77 or below.