Necklace strategy

economic-dictionary

The necklace strategy is a financial options strategy that consists of buying a put option and selling a call option, while you have the underlying asset. That is, it combines a protective put and a covered call.

There are several ways to form a necklace, but the most common one arises when we are in possession of the underlying and we buy a sale option (put) and sell a purchase option (call) to pay the price of the put. That is, if the underlying is the stock of a company we will have X shares of the underlying, X puts and X calls. If the price of the call and put premiums is the same, we will have a collar with zero cost.

This strategy is used when you do not want to sell the underlying asset and you want protection against an expected drop in price, but you want to reduce the cost of that protection, which is done at the cost of losing profit possibilities if the price of the underlying goes up.

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