Yes, that is perfectly possible ant it is called a Collar strategy. What happens in a Collar is that you buy futures and sell a higher call. Here the call premium will help you to reduce the cost of holding on to the futures position. However, the risk if the dollar weakens lower is still there. You can do a double strategy by creating a Collar on the USD-INR contract. How does this strategy work? In the Collar strategy, you will buy USD Futures and then sell a higher call to earn the premium. However, since your downside is open, you will also buy a lower put option so that your overall downside risk is also locked. Remember the futures are the pivotal position here and all the breakeven levels are calculated with reference to the futures position only. Let us check the table below.

Buy Futures

72.00

Prem

N.A

Strategy

Collar strategy

Breakeven

72.05

Buy OTM Put

71 strike

Prem

0.20

Sell OTM Call

73 strike

Prem

0.15

Price

Buy Futures

Buy Put

Put Premium

ITM / OTM

Sell Call

Call Premium

ITM / OTM

P/L On Futur

P/L on Put

P/L on Call

Overall P/L

68.00

72.00

71.00

0.20

ITM

73.00

0.15

OTM

-4.00

2.80

0.15

-1.05

68.50

72.00

71.00

0.20

ITM

73.00

0.15

OTM

-3.50

2.30

0.15

-1.05

69.00

72.00

71.00

0.20

ITM

73.00

0.15

OTM

-3.00

1.80

0.15

-1.05

69.50

72.00

71.00

0.20

ITM

73.00

0.15

OTM

-2.50

1.30

0.15

-1.05

70.00

72.00

71.00

0.20

ITM

73.00

0.15

OTM

-2.00

0.80

0.15

-1.05

70.50

72.00

71.00

0.20

ITM

73.00

0.15

OTM

-1.50

0.30

0.15

-1.05

71.00

72.00

71.00

0.20

ATM

73.00

0.15

OTM

-1.00

-0.20

0.15

-1.05

71.50

72.00

71.00

0.20

OTM

73.00

0.15

OTM

-0.50

-0.20

0.15

-0.55

72.00

72.00

71.00

0.20

OTM

73.00

0.15

OTM

-

-0.20

0.15

-0.05

72.50

72.00

71.00

0.20

OTM

73.00

0.15

OTM

0.50

-0.20

0.15

0.45

73.00

72.00

71.00

0.20

OTM

73.00

0.15

ATM

1.00

-0.20

0.15

0.95

73.50

72.00

71.00

0.20

OTM

73.00

0.15

ITM

1.50

-0.20

-0.35

0.95

74.00

72.00

71.00

0.20

OTM

73.00

0.15

ITM

2.00

-0.20

-0.85

0.95

74.50

72.00

71.00

0.20

OTM

73.00

0.15

ITM

2.50

-0.20

-1.35

0.95

75.00

72.00

71.00

0.20

OTM

73.00

0.15

ITM

3.00

-0.20

-1.85

0.95

75.50

72.00

71.00

0.20

OTM

73.00

0.15

ITM

3.50

-0.20

-2.35

0.95

76.00

72.00

71.00

0.20

OTM

73.00

0.15

ITM

4.00

-0.20

-2.85

0.95

76.50

72.00

71.00

0.20

OTM

73.00

0.15

ITM

4.50

-0.20

-3.35

0.95

77.00

72.00

71.00

0.20

OTM

73.00

0.15

ITM

5.00

-0.20

-3.85

0.95

77.50

72.00

71.00

0.20

OTM

73.00

0.15

ITM

5.50

-0.20

-4.35

0.95

78.00

72.00

71.00

0.20

OTM

73.00

0.15

ITM

6.00

-0.20

-4.85

0.95

What are the inferences that you can draw from the table calculation above pertaining to the Collar strategy. Here are the key observations.

· The total cost of the entire Collar strategy is 0.05. That is because, the trader pays 0.20 for the lower USD put option purchased but gets back Rs.0.15 as the premium on the higher call sold. The difference between premium earned on the call and the premium paid on the put becomes your net cost of the strategy, which is 0.05.

· As a result, this cost of 0.05 is added to the futures to arrive at the breakeven price. Since, the futures have been bought at 72, the breakeven will be at 72.05 (72+0.05). It is above this price that the strategy becomes profitable.

· What is the maximum loss on the above strategy? As can be seen from the above table, the maximum loss of Rs.1.05 is triggered at the lower put strike. How did this figure of Rs.1.05 loss come about? At Rs.71 you lose Rs.1 on the future and there is an additional cost of 0.05 which is your net cost (call premium received – put premium paid). Below this level, the loss remains at Rs.1.05 because from 71 downwards, whatever is lost on the USD futures is gained on the put option.

· What is the maximum profit on the above strategy? As can be seen from the above table, the maximum profit of Rs.0.95 is triggered at the higher call strike. How did this figure of Rs.0.95 max profit come about? At Rs.73 you gain Rs.1 on the future but there is an additional cost of 0.05 which is your net cost (call premium received – put premium paid). Above the level of 73, this level, the profit remains at Rs.0.95 because from 73 upwards, whatever is gained on the USD futures is lose on the short call option.

Let us also look at a situation when the put strike is reduced lower to Rs.70 and the put cost therefore reduces to Rs.0.05 only. How will that change the economics of the Collar?

Buy Futures

72.00

Prem

N.A

Strategy

Collar strategy

Breakeven

71.90

Buy OTM Put

70 strike

Prem

0.05

Sell OTM Call

73 strike

Prem

0.15

Price

Buy Futures

Buy Put

Put Premium

ITM / OTM

Sell Call

Call Premium

ITM / OTM

P/L On Futur

P/L on Put

P/L on Call

Overall P/L

68.00

72.00

70.00

0.05

ITM

73.00

0.15

OTM

-4.00

1.95

0.15

-1.90

68.50

72.00

70.00

0.05

ITM

73.00

0.15

OTM

-3.50

1.45

0.15

-1.90

69.00

72.00

70.00

0.05

ITM

73.00

0.15

OTM

-3.00

0.95

0.15

-1.90

69.50

72.00

70.00

0.05

ITM

73.00

0.15

OTM

-2.50

0.45

0.15

-1.90

70.00

72.00

70.00

0.05

ATM

73.00

0.15

OTM

-2.00

-0.05

0.15

-1.90

70.50

72.00

70.00

0.05

OTM

73.00

0.15

OTM

-1.50

-0.05

0.15

-1.40

71.00

72.00

70.00

0.05

OTM

73.00

0.15

OTM

-1.00

-0.05

0.15

-0.90

71.50

72.00

70.00

0.05

OTM

73.00

0.15

OTM

-0.50

-0.05

0.15

-0.40

72.00

72.00

70.00

0.05

OTM

73.00

0.15

OTM

-

-0.05

0.15

0.10

72.50

72.00

70.00

0.05

OTM

73.00

0.15

OTM

0.50

-0.05

0.15

0.60

73.00

72.00

70.00

0.05

OTM

73.00

0.15

ATM

1.00

-0.05

0.15

1.10

73.50

72.00

70.00

0.05

OTM

73.00

0.15

ITM

1.50

-0.05

-0.35

1.10

74.00

72.00

70.00

0.05

OTM

73.00

0.15

ITM

2.00

-0.05

-0.85

1.10

74.50

72.00

70.00

0.05

OTM

73.00

0.15

ITM

2.50

-0.05

-1.35

1.10

75.00

72.00

70.00

0.05

OTM

73.00

0.15

ITM

3.00

-0.05

-1.85

1.10

75.50

72.00

70.00

0.05

OTM

73.00

0.15

ITM

3.50

-0.05

-2.35

1.10

76.00

72.00

70.00

0.05

OTM

73.00

0.15

ITM

4.00

-0.05

-2.85

1.10

76.50

72.00

70.00

0.05

OTM

73.00

0.15

ITM

4.50

-0.05

-3.35

1.10

77.00

72.00

70.00

0.05

OTM

73.00

0.15

ITM

5.00

-0.05

-3.85

1.10

77.50

72.00

70.00

0.05

OTM

73.00

0.15

ITM

5.50

-0.05

-4.35

1.10

78.00

72.00

70.00

0.05

OTM

73.00

0.15

ITM

6.00

-0.05

-4.85

1.10

What are the inferences that you can draw from the table calculation above pertaining to the Collar strategy. Here are the key observations.

· The total inflow of the entire Collar strategy is (inflow of 0.10) as the call premium received is more than the premium paid on the deeper put option. That is because, the trader pays 0.05 for the lower 70 strike USD put option purchased but gets back Rs.0.15 as the premium on the higher call sold. The difference between premium earned on the call and the premium paid on the put becomes your net inflow of the strategy, which is (inflow of 0.10).

· As a result, this net strategy inflow of 0.10 is deducted from the futures to arrive at the breakeven price. Since, the futures have been bought at 72, the breakeven will be at 69.10 (72-0.10). It is above this price that the strategy becomes profitable.

· What is the maximum loss on the above strategy? As can be seen from the above table, the maximum loss of Rs.1.90 is triggered at the lower put strike of Rs.70 USD-INR. How did this figure of Rs.1.90 loss come about? At Rs.70 strike you lose Rs.2 on the future but there is an additional inflow of 0.10 which is your net inflow (call premium received – put premium paid). Below this level of Rs.70 strike, the loss remains at Rs.1.90 only because from 70 downwards, whatever is lost on the USD futures is gained on the put option.

· What is the maximum profit on the above strategy? As can be seen from the above table, the maximum profit of Rs.1.10 is triggered at the higher call strike of Rs.73. How did this figure of Rs.1.10 max profit come about? At Rs.73 you gain Rs.1 on the future but there is an additional inflow of 0.10 which is your net inflow (call premium received – put premium paid). Above the level of 73, this level, the profit remains at Rs.1.10 only because from 73 upwards, whatever is gained on the USD futures is lost on the short call option.

Let us finally look at a situation when the cal strike is increased higher to Rs.74 and the call premium received therefore reduces to Rs.0.05 only. How will that change the economics of the Collar strategy?

Price

Buy Futures

Buy Put

Put Premium

ITM / OTM

Sell Call

Call Premium

ITM / OTM

P/L On Futur

P/L on Put

P/L on Call

Overall P/L

68.00

72.00

71.00

0.20

ITM

74.00

0.05

OTM

-4.00

2.80

0.05

-1.15

68.50

72.00

71.00

0.20

ITM

74.00

0.05

OTM

-3.50

2.30

0.05

-1.15

69.00

72.00

71.00

0.20

ITM

74.00

0.05

OTM

-3.00

1.80

0.05

-1.15

69.50

72.00

71.00

0.20

ITM

74.00

0.05

OTM

-2.50

1.30

0.05

-1.15

70.00

72.00

71.00

0.20

ITM

74.00

0.05

OTM

-2.00

0.80

0.05

-1.15

70.50

72.00

71.00

0.20

ITM

74.00

0.05

OTM

-1.50

0.30

0.05

-1.15

71.00

72.00

71.00

0.20

ATM

74.00

0.05

OTM

-1.00

-0.20

0.05

-1.15

71.50

72.00

71.00

0.20

OTM

74.00

0.05

OTM

-0.50

-0.20

0.05

-0.65

72.00

72.00

71.00

0.20

OTM

74.00

0.05

OTM

-

-0.20

0.05

-0.15

72.50

72.00

71.00

0.20

OTM

74.00

0.05

OTM

0.50

-0.20

0.05

0.35

73.00

72.00

71.00

0.20

OTM

74.00

0.05

OTM

1.00

-0.20

0.05

0.85

73.50

72.00

71.00

0.20

OTM

74.00

0.05

OTM

1.50

-0.20

0.05

1.35

74.00

72.00

71.00

0.20

OTM

74.00

0.05

ATM

2.00

-0.20

0.05

1.85

74.50

72.00

71.00

0.20

OTM

74.00

0.05

ITM

2.50

-0.20

-0.45

1.85

75.00

72.00

71.00

0.20

OTM

74.00

0.05

ITM

3.00

-0.20

-0.95

1.85

75.50

72.00

71.00

0.20

OTM

74.00

0.05

ITM

3.50

-0.20

-1.45

1.85

76.00

72.00

71.00

0.20

OTM

74.00

0.05

ITM

4.00

-0.20

-1.95

1.85

76.50

72.00

71.00

0.20

OTM

74.00

0.05

ITM

4.50

-0.20

-2.45

1.85

77.00

72.00

71.00

0.20

OTM

74.00

0.05

ITM

5.00

-0.20

-2.95

1.85

77.50

72.00

71.00

0.20

OTM

74.00

0.05

ITM

5.50

-0.20

-3.45

1.85

78.00

72.00

71.00

0.20

OTM

74.00

0.05

ITM

6.00

-0.20

-3.95

1.85

What are the inferences that you can draw from the table calculation above pertaining to the Collar strategy. Here are the key observations.

· The total cost of the entire Collar strategy is 0.15 as the call premium received on the deeper call option is lower than the premium paid on the put option. That is because, the trader pays 0.20 for the lower 71 strike USD put option purchased but gets back only Rs.0.05 as the premium on the higher strike call sold. The difference between premium earned on the call and the premium paid on the put becomes your net cost of the Collar strategy which is Rs.0.15.

· As a result, this net strategy outflow of 0.15 is added to the futures price to arrive at the breakeven price. Since, the futures have been bought at 72, the breakeven will be at 72.15 (72+0.15). It is above this price that the Collar strategy becomes profitable.

· What is the maximum loss on the above strategy? As can be seen from the above table, the maximum loss of Rs.1.15 is triggered at the lower put strike of Rs.71 USD-INR. How did this figure of Rs.1.15 loss come about? At Rs.71 strike you lose Rs.1 on the futures but there is an additional outflow of 0.15 which is your net outflow (call premium received – put premium paid). Below this level of Rs.71 strike, the loss remains at Rs.1.15 only because from 71 downwards, whatever is lost on the USD futures is gained on the put option.

· What is the maximum profit on the above strategy? As can be seen from the above table, the maximum profit of Rs.1.85 is triggered at the higher call strike of Rs.74. How did this figure of Rs.1.85 (2.00 - 0.15) max profit come about? At Rs.74 you gain Rs.2 on the future but there is an additional cost of 0.15 which is your net cost (call premium received – put premium paid). Above the level of 74, this level, the profit remains at Rs.1.85 only because from 74 upwards, whatever is gained on the USD futures is lost on the short call option.

The trader needs to take a call on the appropriate strategy and the strike prices based on their risk reward ratios. Typically, one can simulate the break even points under various strike permutations and then take a final call.