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Sir John Moffat,
I have a query i.e. what strike/exercise price should be chosen when we have to buy put options or sell calls options where the question relates to borrowing?
Similarly, what strike price shall be chosen for buying call options and selling put options where the question relates to an investor’s perspective?
It is quite confusing especially in the exam situation.
A borrower will always buy a put option in order to limit the maximum interest payable, and if creating a collar will also sell a call option, which limits the minimum interest payable.
Depending on how many exercise prices are available, then they can be several collars possible and ideally you should show all of them (although recently there are usually only two prices and so there is only one collar possible). For a borrower, the exercise price of the put option must be lower than that of the call option, otherwise it would not make sense 🙂
Everything above is the same in reverse for an investor.
Have you watched my free lectures on collars?
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