Collar

What Is a Collar?

A collar is an options strategy applied to an existing long stock position. It simultaneously sells a covered call above the current stock price (capping upside) and buys a protective put below the current price (limiting downside). The two options partially offset each other in cost — in a zero-cost collar, the call premium collected exactly covers the put premium paid.

The collar creates a defined profit/loss range. Above the short call’s strike, additional gains are surrendered. Below the long put’s strike, losses are eliminated. Between the two strikes, the position behaves like unhedged stock.

Example (stock held at $100):

• Sell the $110 call for $2.00 (cap upside at $110)
• Buy the $90 put for $2.00 (floor downside at $90)
• Net cost: $0.00 (zero-cost collar)
• Max gain: $10 per share (from $100 to $110)
• Max loss: $10 per share (from $100 to $90)

Why It Matters for Options Traders

Collars protect concentrated or appreciated stock positions. A trader holding large gains — from employee stock ownership, long-term appreciation, or a recent run — faces the risk of giving back those gains. Buying a protective put alone costs premium; the collar finances that protection by selling upside.

The strategy is also common ahead of binary events. If a trader holds stock into earnings and wants to protect against a large downside move while retaining some upside, a collar can define both sides of the risk. The zero-cost structure (when achievable) makes it particularly attractive since it requires no additional capital outlay.

The tradeoff is the surrendered upside. If the stock continues to appreciate beyond the short call’s strike, the trader doesn’t benefit. This makes collars most appropriate when the primary objective is capital preservation rather than maximizing returns, or when the trader would be satisfied selling the position at the call’s strike price.

Key Characteristics

• Structure: Long stock + short call (covered call) + long put (protective put)
• Cost: Can be structured as zero-cost when call premium equals put premium
• Maximum gain: Short call strike minus stock purchase price (minus any net debit)
• Maximum loss: Stock purchase price minus long put strike (plus any net debit)
• Delta exposure: Reduced — the options partially hedge the long stock position
• Ideal use case: Protecting an existing appreciated position without liquidating it