A protective collar involves buying an out-of-the-money put and writing an out-
of-the-money call on an underlying asset that you own. Let’s say you own an S&P 500 index
security that is currently trading at $30/share. You bought the index at $10 per share so you
currently have a big capital gain. You don’t want to sell your shares, but you want to lock in
your profits with a protective collar for the next year. You want to make sure you can sell
your shares for at least $29/share. The standard deviation of returns on the S&P 500 is 20%
and the assume risk free rate is 2%.