Collar Strategy
A collar protects a stock you already own against a significant decline — funded by selling a call that caps your upside. You give up some potential gain in exchange for downside protection. When structured carefully, the protection can cost nothing at all.
How a Collar Works
You own 100 shares of a stock. You buy a put below the current price (downside protection) and sell a call above the current price (upside cap) on the same expiration. The premium you receive from selling the call offsets some or all of the cost of buying the put.
The result is a bounded position. No matter how far the stock falls, your put protects you below its strike. No matter how high the stock rises, your call caps your gains at the call strike. You're trading potential upside for protection against a crash.
Example: You own 100 shares of a stock at $100. You buy the $90 put for $3.00 and sell the $110 call for $3.00. Net cost: $0. If the stock falls to $75, your put protects you — maximum loss is $10 per share ($100 purchase − $90 put strike). If the stock rises to $120, you profit $10 per share ($110 call strike − $100 purchase price) but give up the extra $10. If it stays flat, both options expire and you keep your shares.
Maximum Profit, Maximum Loss, and Breakeven
Maximum profit: (Call strike − stock purchase price + net premium received) × 100. In the example: ($110 − $100 + $0) × 100 = $1,000.
Maximum loss: (Stock purchase price − put strike − net premium received) × 100. In the example: ($100 − $90 − $0) × 100 = $1,000. This is the key feature — your loss is capped regardless of how far the stock falls.
Breakeven: Stock purchase price plus net premium paid. If the collar is zero-cost, the breakeven is simply the purchase price of the stock.
The Zero-Cost Collar
A zero-cost collar (also called a costless collar) is entered when the premium received from selling the call exactly offsets the cost of buying the put. In the example above, both options cost $3.00, so the net cost is zero.
The zero-cost collar is popular with executives and large shareholders who own concentrated stock positions — they want downside protection without paying out of pocket. The trade-off is that upside is capped at the call strike. For a long-term shareholder who believes the stock will continue to rise significantly, capping the upside is a meaningful cost even if no cash changes hands.
When to Use a Collar
You own stock with a large unrealized gain and want to protect it. A collar locks in a floor below the current price without triggering a taxable sale — useful when you can't or don't want to sell the shares.
You own a volatile stock and want protection through a specific event. Buying a put before earnings, an FDA decision, or a macro risk event and funding it with a call cap gives you defined protection for the period of concern.
You want to reduce the effective cost of put protection. If you're paying $5 for a put but can sell a call for $4, your net protection cost is $1 instead of $5. The call cap you're accepting may be well above where you expect the stock to go.
Frequently Asked Questions
Does a collar require a margin account?
No. Since you own the underlying shares, the short call is "covered" — you're not taking on naked short call risk. A collar can be established in a standard non-margin account.
What happens if the call is exercised?
If the stock rises above the call strike at expiration, your shares are called away at the call price. You receive that price for your shares and the collar expires. This is not necessarily bad — you've locked in a profit at the call strike.
How is a collar different from a covered call?
A covered call just sells the call — it has no downside protection. A collar adds the put purchase. The covered call generates more income because you're not spending premium on the put, but you remain fully exposed to any decline in the stock.
Can I roll the collar as time passes?
Yes. Many shareholders run rolling collars — when one expires, they sell a new call and buy a new put for the next period. This maintains ongoing protection while continuously generating some income from the call sales.