Collar

The collar is a protective options strategy that combines two positions you may already know: a protective put and a covered call, held simultaneously against 100 shares of stock you own. The put provides downside protection while the call generates premium that offsets the cost of that protection. The result is a position with a defined floor and a defined ceiling, often established at little or no net cost.

Bias: Neutral to mildly bullish, primarily defensive Risk profile: Defined on both sides Ideal conditions: You own stock, want downside protection, and are willing to cap upside to reduce or eliminate the cost of that protection

How it is constructed

A collar has three components:

• Own 100 shares of the underlying stock
• Buy 1 OTM put below the current price (downside protection)
• Sell 1 OTM call above the current price (generates premium to offset the put cost)

The premium collected from selling the call reduces or fully covers the cost of buying the put. When the two premiums are equal, it is called a zero-cost collar.

Setup example

You own 100 shares of AAPL purchased at $185, now trading at $190. You want to protect against a decline over the next few months but do not want to pay much for that protection.

• Buy the $180 put for $3.00 (downside protection)
• Sell the $200 call for $2.80 (offsetting premium)
• Net cost of the collar: $3.00 minus $2.80 = $0.20 per share ($20 total)

For $20, you have established a position that cannot lose value below $180 and cannot gain above $200.

Max profit, max loss, and the protected range

Floor (max loss point): the put strike. Below $180, your put gains value dollar for dollar as the stock falls, offsetting further losses on your shares.

Ceiling (max profit point): the call strike. Above $200, your short call caps further gains. Your shares are called away at $200 if the stock finishes above it.

Protected range: between $180 and $200, your position moves with the stock, floored by the put and capped by the call.

• Max gain (if called away at $200): ($200 minus $185 cost basis) minus $0.20 net collar cost = $14.80 per share ($1,480)
• Max loss (if stock falls below $180): ($185 cost basis minus $180 floor) plus $0.20 net cost = $5.20 per share ($520)

When to use a collar

Best conditions:

• You hold a stock with unrealized gains you want to protect without selling (and triggering a taxable event)
• You are nervous about a specific upcoming event (earnings, macro uncertainty) but want to keep your shares
• You are willing to give up upside above the call strike in exchange for cheap or free downside protection
• You want a defined, predictable range for the position over a set timeframe

Avoid when:

• You are strongly bullish and expect a large move higher (the call caps your upside)
• The stock has low IV, making the call premium too small to meaningfully offset the put cost
• You would not mind simply selling the shares instead (sometimes selling is simpler than collaring)

The zero-cost collar

The most popular version of this strategy is the zero-cost collar, where you choose strikes such that the call premium collected exactly equals the put premium paid. This gives you downside protection for no net cash outlay, at the cost of capping your upside.

To build a zero-cost collar, adjust the strikes until the premiums match. A wider gap between the put and call strikes gives more room for the stock to move but may not be exactly zero cost. A narrower gap tightens the range but makes matching the premiums easier.

Collar vs protective put alone

A protective put alone provides downside protection but costs premium with no offset. A collar adds a short call to fund that protection.

• Protective put alone: full downside protection, unlimited upside, but you pay the full put premium
• Collar: full downside protection, capped upside, but the put is cheap or free

The collar is the right choice when you are willing to trade away upside potential in exchange for cheaper protection. The protective put alone is better when you want to keep unlimited upside and are willing to pay for it.

Managing a collar

If the stock rises toward the call strike: you can roll the call up and out to a higher strike to give more upside room, though this may require paying a debit.

If the stock falls toward the put strike: your protection is working as designed. You can hold to expiration or close the profitable put for a gain and reassess.

At expiration within the range: both options expire worthless. You keep your shares and can establish a new collar for the next period.

Related terms: Protective put, covered call, call option, put option, defined risk, zero-cost collar

Try it on Stryke: Screen for put and call strikes to build a collar on any stock you own using the Options Screener.