What is the goal of an Option Collar strategy?

The goal of an Option Collar strategy is to limit potential losses while maintaining some degree of upside potential. This strategy typically involves holding the underlying asset while simultaneously purchasing a protective put option and selling a call option against that same asset.

By buying a put option, the investor secures the right to sell the asset at a predetermined price, which effectively sets a floor on potential losses. This means that even if the underlying asset declines in value, the losses are contained because the put option will offset some of those losses.

On the other side of the collar, selling a call option generates income (through the premium received), which can help offset the cost of purchasing the put option. However, this also means that the upside is capped, as if the underlying asset’s price rises above the strike price of the call option, the investor will have to sell the asset at that agreed price.

Overall, this strategy provides a balanced approach to risk management by protecting against significant downside while still allowing for some profit potential during favorable market movements. Thus, the primary objective aligns perfectly with the correct answer: limiting losses while preserving the potential for gains.