Mixing Exposure  •  261
this way, we have locked in a worst possible gain of 11.4 percent and a best 
possible gain of 20.5 percent for the next five and a half months.
Let’s look at another collar with a different profit and loss profile:
Collar 2: 78 Days to Expiration
Strike Price ($) Bid (Ask) Price ($)
Sold call 70  0.52
Purchased put 62.50 (1.55)
Net debit (1.03)
This collar yields the following best- and worst-case ESPs and corresponding 
returns (assuming a $55 buy price):
ESP ($) Return (%)
Best case 68.97 25.4
Worst case 61.47 11.8
This shows a shorter-tenor collar—about two and a half months be-
fore expiration—that allows for more room for capital gains. This might be 
the strategy of a hedge fund manager who is long the stock and uncertain 
about the next quarterly earnings report. For his or her own business rea-
sons, the manager does not want to show an unrealized loss in case Qual-
comm’s report is not good, but he or she also doesn’t want to restrict the 
potential capital gains much either.
Calculating the ESPs and the returns in the same way as described 
here, we get a guaranteed profit range from around 12 to over 25 percent. 
One thing to note as well is that the protection is provided by a put, and 
a put option can be sold any time before expiry to generate a cash inflow 
from time value. Let’s say then that when Qualcomm reports its quarterly 
earnings, the stock price drops to $61—a mild drop that the hedge fund 
manager considers a positive sign. Now that the manager is less worried 
about the downside exposure, he or she can sell the put for a profit.