Ken Webster manages a $400 million equity portfolio benchmarked to the S&P 500 index. Webster believes the market is overvalued when measured by several traditional fundamental/ economic indicators. He is concerned about potential losses but recognizes that the S&P 500

index could nevertheless move above its current 1,766 level. Webster is considering the following option collarstrategy:

? Protection for the portfolio can be attained by purchasing an S&P 500 index put with a strike price of 1,760.

? The put can be approximately financed by selling one 1,800 strike-price call for every put purchased.

? Because the combined delta of the call and put positions (see following table) is greater than ?1 (i.e., ?.44 ? 30 = ?.77), the options will not lose more than the underlying portfolio will gain if the market advances.

The information in the following table describes the two options used to create the collar.

Characteristics Option price Option implied volatility Option's delta Notes: . Ignore transaction costs. - S&P 500 historical 30-day volatility = - Time to option expiration = 30 days. 1,800 Call $3410 22% 030 2 3%. 1,760 Put $3220 2% o44