As an executive, you received stock options that you recently exercised. However, you cannot legally sell the stock for the next six months. Currently the stock is selling for

$38.25. A call to buy the stock at $40 is selling for $3.38 and a put to sell the stock at

$35 is selling for $1.94. How could you use a collar to reduce your risk of loss from a decline in the price of the stock? Verify that the collar does achieve its objective.

Option strategies are not limited to covered puts and calls, protective puts and calls, straddles, bull and bear spreads, and collars. Other strategies include the “strip,” the “strap,” and the “butterfly spread.” The following problems illustrate these strategies. (You could also construct strips, straps, and butterflies using puts.)