Payoff of bull spread vs zero cost collar

Collar …. “unlimited” downside and upside
Spread … limited upside and downside
 
I think the difference is in when you would use them.
Bull spread, you think the stock is going to go up, but not that much (not above high call strike). The sold high call subsidizes the purchased low call.
Collar you just want to be protected from a drastic rise or fall of the stock, and want to buy 1 and sell the other to pay for it, giving up the upside.
 
CelticsFA11 Wrote:
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> I think the difference is in when you would use
> them.
>
> Bull spread, you think the stock is going to go
> up, but not that much (not above high call
> strike). The sold high call subsidizes the
> purchased low call.
>
> Collar you just want to be protected from a
> drastic rise or fall of the stock, and want to buy
> 1 and sell the other to pay for it, giving up the
> upside.
Thanks. The shape is the same right?
 
maisatomai Wrote:
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>
>
> Thanks. The shape is the same right?
Yes it will be the same.
 
And for collar, we also own the underlying stock while for bull call spread, we only have the 2 calls (1 long 1 short), isn’t it?
 
st_laurent Wrote:
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> And for collar, we also own the underlying stock
> while for bull call spread, we only have the 2
> calls (1 long 1 short), isn’t it?
Yes for collar we own the underlying stock, we short a call and long a put.
For bull call spread we long 1 call and short another call.
 
pfcfaataf Wrote:
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> Collar …. “unlimited” downside and upside
> Spread … limited upside and downside
sry, I meant collar on standalone basis, not combined with the stock, as described in CFAI…
 
Okay, okay, okay. From my understanding….
- A collar can be any type of spread where your return is within a range. This includes bull spread and bear spreads
- Bull spread = a certain type of spread
- Bear spread = another certain type of spread
- Zero cost collar = a very specific type where the option you write is the same amount as the collar you buy so effectively you get insurance at zero cost.
Apologize if I made an error as I don’t have my stuff with me, but someone comment if I am wrong.
 
Erm…st laurent is correct.
The payoff is the same but the approach is different.
Bull call spread = long call (low strike), short call (high strike). This also can be constructed at a zero cost.
Zero cost collar = long asset, long put (i.e. right to sell it at the low stike), and short call (i.e someone buys the asset from you at the high strike). If it is constructed at zero cost the premiums from the call and put offset each other.
So I guess the key differentiating factor is 1) Whether the investor holds the underlying or not and 2) They are structuring it at zero cost.
 
Spreads cannot be structured as zero-cost (if amounts/notionals/number of contracts of options are equal)
 
matt85 Wrote:
——————————————————-
> Erm…st laurent is correct.
>
> The payoff is the same but the approach is
> different.
>
> Bull call spread = long call (low strike), short
> call (high strike). This also can be constructed
> at a zero cost.
>
> Zero cost collar = long asset, long put (i.e.
> right to sell it at the low stike), and short call
> (i.e someone buys the asset from you at the high
> strike). If it is constructed at zero cost the
> premiums from the call and put offset each other.
>
> So I guess the key differentiating factor is 1)
> Whether the investor holds the underlying or not
> and 2) They are structuring it at zero cost.
If you structure a bull spread at zero cost, you are effectively going to lock in the same exercise price. There is no spread there because it is the price at which you call the security that it will get called away from you. A better name for that transaction will be foolish spread.
 
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