Compare protective puts and collars after premium and fees

Identifier: C4T5L3 | Revision: 2026-10-26 | Planned study: 10–15 minutes, excluding extended practice.

Decision and objectives

Choose whether the method addresses this lesson’s task before placing an order. Objectives: 1. Calculate protection floors after costs. 2. Measure the upside surrendered in a collar. 3. Compare insurance with an unhedged baseline.

Prerequisite: C4T5L2.

All numbers, quotes, contract terms and dates in the case are hypothetical teaching assumptions, not a listed series or offer. Unless varied below, options are European, expire together in 90 calendar days, are cash settled in TRY, and use 100 underlying units per contract. Premiums are TRY per underlying unit, paid at entry; signed quantities identify long (+) and short (−) legs. Assume no distributions and zero financing for the isolated payoff, no holiday adjustment, and final cash on the next business day. Actual tax is excluded, not assumed zero.

Mechanics

A protective put adds a long put to a share holding. A collar adds both a long put and a short call. The put establishes an economic terminal floor under matched terms; the call helps pay for the put by limiting upside. A zero-premium collar is possible under some quotes but never implies zero total cost or zero risk. Under cash settlement, the investor keeps the shares and receives/pays option differences. Physical settlement changes the delivery and funding sequence.

Price and return drivers

Protective terminal value per unit = max(S,put strike). Subtract share purchase cost, put premium and charges to obtain profit. Collar value = min(max(S,put strike),call strike), with net premium and charges deducted. The floor applies to the contractual underlying fixing and expiry; a portfolio that differs from the underlying retains basis risk. Shares sold before the protection date and unmatched expiries cannot be inserted into the static terminal formula.

Worked case

Hold100 synthetic shares bought100. Protective put: +1 K95 put at4, multiplier100, total charges30. Combined cost10430; minimum value9500, maximum loss930; upside remains open. Collar: same shares, +1 K95 put at4,−1 K110 call at3; total charges40. Net cost10140; minimum9500 and maximum11000 imply maximum loss640 and gain860.

The collar reduces the premium commitment but gives up gains above110. The unhedged baseline is essential to judge the insurance cost.

Adverse case

Before expiry atS90, supplied put bid7 and call close ask0.50 produce collar liquidation value9000+700−50=9650; net9650−10140=−490 under the same total charge boundary. That differs from its expiry floor loss640 because the put retains time value and the call still costs money to close. A separate real portfolio down more than the option underlying can breach the intended economic floor. Protection does not cover issuer/custody failures, poor execution or a wrong contract size.

Practical use

Match the protected holdings, fixing, dates and deliverables; report any basis risk. The cash-settled overlay in the case keeps the shares, while a physical collar can transfer them.

For any actual domestic implementation, verify the exact issue/contract, authorized intermediary, account permission and executable size. Include spread, commissions, passed-through fees, funding/borrow, custody and exercise/exit costs without double-counting embedded charges. Recheck income year, residency/status, issue/acquisition dates and effective tax law; all case results remain before actual tax.

Decision boundaries

Use a put when preserving upside and a known terminal floor justify the premium. Use a collar when the spending objective fits within a capped upside and the short call is operationally acceptable. Decline if the protection expiry precedes the cash need or if the actual holdings are too different to support the claimed floor. A falling asset may cause the option to gain while the total portfolio still loses; report the combined result instead of celebrating the hedge in isolation.

Practice and references

Exercise:100 shares bought50; +1 putK45 costs2;−1 callK60 receives1.50; multiplier100, total costs30. Solution: Net commitment=5000+200−150+30=5080. Minimum value4500 gives maximum loss580; maximum value6000 gives maximum gain920. At expiryS55, result5500−5080=420. The floor is below initial capital after deductible and costs.

Takeaway: A protective put preserves upside at a premium cost; a collar lowers premium by surrendering gains above its call strike. Reference links: product card, formula; glossary: Protective put; Collar; Protection floor. Next: C4T5L4. Topic test.

Sources: Borsa Istanbul: Options (retrieved 2026-10-26; General information and basic concepts). Borsa Istanbul: Settlement Method (retrieved 2026-10-26; Settlement by contract family). Options Industry Council: All Strategies (retrieved 2026-10-26; Strategy descriptions). GIB: Provisional Article67 Guide for Individuals (retrieved 2026-10-26; Sections1,3–9 and19; publication introduction). Revision 2026-10-26; recheck changing terms before publication.

Shared reference guide