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.

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):

• 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

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).

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

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)

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.

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.

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.