Collar
Own stock, buy a protective put, and sell a covered call to limit both gains and losses.
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What Is a Collar?
A collar is a three-component position: you own 100 shares of a stock, buy an out-of-the-money put option to protect against a large decline, and sell an out-of-the-money call option to help finance the cost of the put. The result is a position where your downside is capped at the put strike (the put provides a floor) and your upside is capped at the call strike (the call obligates you to sell if the stock rises above it). A well-constructed collar can often be entered for zero net premium — the call you sell covers the cost of the put you buy — creating a "free" hedge. Collars are commonly used by investors who hold large, concentrated stock positions (such as company executives holding stock grants) and want to protect against a sharp decline without selling the shares.
When to Use a Collar
Use a collar when you own a stock position you want to hold long-term but are concerned about significant short-term downside risk. Common scenarios include: you hold a concentrated position in a single stock and a large decline would be financially damaging; you are approaching a binary event (earnings, regulatory decision) where the stock could move sharply in either direction; or market conditions have become particularly uncertain and you want to reduce risk without triggering a taxable sale. The collar is also used for tax reasons — by buying the put and selling the call instead of selling the shares, you can defer the capital gain into a future tax year while still being substantially protected from downside.
Trade Structure
Own 100 shares of the stock. Buy 1 OTM put at a strike below the current price (the "floor" — your maximum loss level). Sell 1 OTM call at a strike above the current price (the "ceiling" — your maximum gain level), same expiration. The call premium should ideally offset the put premium, resulting in a zero-cost (or credit) collar. If the put costs more than the call generates, you pay a net debit.
Max Profit
(Short call strike − stock purchase price + net premium received) × 100. This is achieved if the stock rises to or above the call strike at expiration, at which point your shares are called away at the call strike and you keep any net premium received. The gain above the call strike is forfeited — you cannot benefit from a rally beyond your ceiling.
Max Loss
(Stock purchase price − long put strike − net premium received) × 100. This is the maximum you can lose if the stock collapses below the put strike — the put guarantees you can sell your shares at the put strike regardless of how far the stock falls. The put premium cost reduces the effective floor value.
Breakeven
Stock purchase price plus net premium paid (or minus net premium received if the collar was entered for a credit). If entered for zero cost (zero-cost collar), the breakeven equals the original stock purchase price. Below the stock purchase price, the collar shows a loss that is capped at the put strike.
Greeks Profile
Delta is significantly reduced compared to owning stock outright. The long put adds negative delta and the short call adds negative delta — together they reduce your net exposure to the stock's daily moves. The collar behaves like a partially hedged stock position. Theta is approximately zero — the long put costs theta but the short call generates theta, roughly offsetting. Vega is mixed and typically small — the long put and short call partially offset each other's vega exposure.
Collar Trading Tips
- Try to structure the collar for zero net cost — choose strikes where the call premium equals the put premium to eliminate the out-of-pocket cost of the hedge.
- Place the put strike at your maximum acceptable loss level — where a decline below that point would cause real financial hardship.
- Place the call strike at a price you would genuinely be happy selling your shares — do not set the ceiling so tight that you sacrifice significant upside unnecessarily.
- Collars can defer a capital gain — consult a tax advisor before using a collar purely for tax purposes, as wash-sale and constructive-sale rules may apply.
- Roll the collar forward at expiration to maintain ongoing protection — sell a new call, buy a new put for the next period.
- Executives using collars on company stock should confirm compliance with trading policies and SEC blackout periods before entering.
- A zero-cost collar on a high-dividend stock may generate a net credit (the call premium exceeds the put premium) because the call is discounted for expected dividends.
- The collar is not a profit-maximizing strategy — it is a risk-management strategy. Use it when protection matters more than upside capture.