Which components are involved in a collar strategy?

A collar strategy is an investment strategy that involves a combination of options to limit both potential losses and gains, effectively creating a price range or "collar" on the investment. The main components of this strategy are buying a floor (which sets a minimum price) and selling a cap (which sets a maximum price).

In this context, buying a floor ensures that the investor has protection against downward price movement, as the floor guarantees a certain level of value. On the other hand, selling a cap allows the investor to finance the purchase of the floor by capping their potential upside — meaning they will not benefit from price increases beyond the cap level.

Therefore, the correct answer accurately reflects the mechanics of the collar strategy, which is aimed at managing risk while still retaining some upside potential within defined limits.