 Hello and welcome to this session in which we will discuss scholars. It's an option strategies. This topic is covered on the CPA and CFA exam, also an essential work principles of investments. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1800 plus accounting, auditing, finance, as well as Excel tutorials. If you like my lectures, please like them and share them. Connect with me on Instagram and like my Facebook page. On my website, farhatlectures.com, you will find additional resources to complement this course as well as other courses such as accounting and introduction to finance, tax, audit, so on and so forth. Let's take a look at this concept of scholars. What's the basic or the main idea? What you are doing here is you're trying to protect your downside risk, but at the same time you are willing to limit your upside. Your concern is I want to limit my losses. In case the stock tanked, I want to limit my losses. In case the stock went to the moon, I'm okay with limiting my upside. Simply put, I'm unwilling to risk losses beyond a certain level. When would that happen? That would happen when you want to try to preserve your position, try to preserve your wealth. Let's assume you're close to retirement and you're going to liquidate everything and live with cash for the next 20 years. But you don't want your portfolio or let's assume you have a stock index. You don't want that stock index to fall below a certain number. If it went up, you're okay. You would limit your upside, but you want to limit your losses. So what you do is this. You own the stock or the index. Let's assume it's a stock. You own the stock. Let's assume you own QQQ, which is the NASDAQ 100. You own the stock or the ETF. You buy a put and why would you buy a put? You buy a put to protect your downside just in case something happened. You can sell that QQQQ at a certain level and at the same time you sell a call. Well, why would you sell a call? You sell a call. It means you're willing to surrender your QQQ at a certain price. Now, why would you buy a put and sell a call? For simplicity, we're going to assume in our example, let's assume you buy the put for a dollar. You would sell the call for a dollar. So guess what? You don't really pay anything. So the transaction finance itself. What you did here is you limited your losses. You limited your losses to the downside and you limited your gain to the upside. The best way to illustrate this is to work with some example. Assume you're contemplating buying a house for 160. So this is what you want. So you want $160,000. Your current wealth level is $140,000. And you are unwilling to risk losing more than $20,000. So you have $140,000 now, but you don't want to lose more than $20,000. That's your downside limit. Well, you establish a collar by buying 2,000 shares, selling at $70 of a certain company. So you invested your $140,000 by buying those shares. What you do at the same time, you purchase 2,000 puts with an exercise price of 60. You would say, okay, now I'm going to buy enough puts that if anything happened, if this company went bankrupt, I can still sell it at $60. So simply put, if I can still sell it at $60, worst case situation, I would receive $120,000 and I would have lost $20,000, because that's the amount I'm willing to risk. At the same time, I would write a call with an exercise price of 80. At the same time, I will write sell a call and we're going to assume that buying and selling, I'm going to be receiving the same amount of money. Therefore, they cancel each other out at 80. What does that mean? It means up to $80, I'm going to be enjoying the gain. Once it exceeds $80, I'm going to have to surround my stock, but that's okay. I'll be making a $10 profit, but let's assume the stock went up to $120. Well, the other individual will enjoy the gain above $80. Okay, the person that purchased my call, but I'm okay with that, because what I did is I risked my losses and I limited my gain. So what would things would look like? So for example, if it's less than $60, you will get $60,000. If it's more than $80, you will get $80,000. So simply put, in other words, you have a floor and you have a ceiling. So you are at $70, the maximum you would lose, this is the floor and this is the ceiling and the maximum you will get is $80 per share, which is $160,000. So if the stock went above this, you don't enjoy the gain. If the stock went below this, that's fine. You would still get $60,000. So this is how callers work, is to protect your wealth, to protect your position. In the next session, what I would do, I would work an example that's going to illustrate these various strategies that we looked at, protective call, a protective put, covered call, straddle and callers in this situation. As always, I'm going to remind you to visit my website, farhatlectures.com, for additional resources for your accounting, as well as your finance, CPA, CFA courses. Good luck, study hard and most importantly, please, please, please stay safe.