Collar (options strategy) A collar is a conservative options strategy that limits downside risk on a long stock position while capping upside potential. It combines a protective put (buy a put) with a covered call (sell a call), typically using out-of-the-money strikes that expire in the same month. The strategy can be structured for little or no net cost and is often used to preserve gains or hedge against short-term volatility. Key takeaways
* Protects against large losses while limiting large gains.
* Consists of buying a downside put and selling an upside call on a stock you already own.
* Can be implemented for a net debit or net credit depending on option premiums.
* Best for investors who are moderately bullish or neutral and want to preserve gains.
How a collar works A collar involves three elements:
1. Own shares of the underlying stock.
2. Buy an out-of-the-money put (protective put) to set a floor under the position.
3. Sell an out-of-the-money call (covered call) to collect premium and offset the put cost. Explore More Resources
Practical setup checklist:
The put and call should expire the same month.
Use the same number of contracts (one contract = 100 shares).
Put strike should be below the current stock price (floor).
Call strike should be above the current stock price (ceiling).
* Ideally, the call premium offsets the put premium, creating a low-cost or net-credit collar. Payoff, breakeven, and maximum outcomes Breakeven depends on whether the options produce a net debit (cost) or net credit (income): Explore More Resources
* Breakeven (if net debit) = Stock purchase price + Net premium paid
* Breakeven (if net credit) = Stock purchase price - Net premium collected
Maximum profit and maximum loss (per share): If the collar is initiated for a net debit:
Maximum profit = Call strike − Stock purchase price − Net premium paid
Maximum loss = Put strike − Stock purchase price − Net premium paid Explore More Resources
If the collar is initiated for a net credit:
Maximum profit = Call strike − Stock purchase price + Net premium collected
Maximum loss = Put strike − Stock purchase price + Net premium collected Interpretation:
Maximum profit occurs if the stock is called away at the call strike at expiration.
Maximum loss is capped by the put strike (minus any net premium effects). Explore More Resources
Example You own 100 shares bought at $80 (current market $87).
Buy 1 put with strike $77, premium $3.00
Sell 1 call with strike $97, premium $4.50 Net result:
* Net credit = Call premium − Put premium = $4.50 − $3.00 = $1.50 per share → $150 total Explore More Resources
Breakeven:
Breakeven = Stock purchase price + Put cost − Call premium = $80 + 3.00 − 4.50 = $78.50 Maximum outcomes (credit collar):
Maximum profit = Call strike − Stock purchase price + Net premium = 97 − 80 + 1.50 = $18.50 per share = $1,850
* Maximum loss = Put strike − Stock purchase price + Net premium = 77 − 80 + 1.50 = −$1.50 per share = −$150 (i.e., a $150 loss) Explore More Resources
Pros and cons Pros
Provides explicit downside protection (floor) for the stock.
Allows some upside participation up to the call strike.
Can be low-cost or produce a net credit if call premium exceeds put cost.
Useful for preserving gains when approaching financial goals. Cons
Caps upside beyond the call strike.
May require active monitoring and adjustments.
Buying a put adds cost compared with a simple covered call.
If the stock never falls to the put strike, the put premium is a realized expense. Explore More Resources
When to use and adjustments When to use:
You’ve realized gains and want to protect principal.
You are moderately bullish or neutral but fear short-term volatility.
Volatility is elevated, making protective puts more attractive (when offset by call premiums). Adjustments:
You can unwind or modify the collar before expiration (buy back the short call, sell the long put, roll strikes/dates). Adjusting changes risk and may incur additional cost or credit.
* Revisit strike selection and expiration based on changes in outlook, time horizon, and volatility. Explore More Resources
Why it’s called a “collar” The strategy places a floor (put) and a ceiling (call) around the stock price, effectively “collaring” the position between two strike prices—limiting downside and capping upside. Bottom line A collar is a defensive, structured way to protect a long stock position while limiting potential gains. It suits investors prioritizing capital preservation or hedging short-term risk, especially when they are not strongly bullish on further large gains. Proper strike selection, timing, and monitoring determine cost-effectiveness and overall success. Explore More Resources