* Long the underlying
* long a put option at strike price X (called the "floor")
* Short a call option at strike price (X+a) (called the "cap")
These latter two are a long Risk reversal position. So:
Underlying - Risk_Reversal = Collar
Consider an investor who owns one hundred shares of a stock with a current share price of $5. An investor could construct a collar by buying one put with a strike price of $3 and selling one call with a strike price of $7. The collar would ensure that the gain on the portfolio will be no higher than $2 and the loss will be no worse than $2 (before deducting the net cost of the put option, i.e., the cost of the put option less what is received for selling the call option).
