Collar — Options Strategy

A collar is a zero-cost (or low-cost) hedging strategy that combines owning shares with buying a protective put AND selling a covered call. The premium received from selling the call is used to finance (fully or partially) the cost of buying the put, creating a net-zero or minimal cost structure while establishing both a floor and a ceiling on the position.

The mechanics: you own 100 shares, buy a put at a lower strike for downside protection, and sell a call at a higher strike to collect premium. The put protects against losses below its strike; the call limits gains above its strike. You are essentially 'collaring' the position into a defined range of outcomes—capped upside in exchange for capped downside.

Collars are particularly useful for holding large, concentrated stock positions that you cannot sell for tax reasons. If you hold $1 million in a single stock and cannot sell due to tax considerations, a zero-cost collar eliminates catastrophic downside risk without triggering a sale event. The trade-off is giving up the upside above the call strike—acceptable if your primary concern is capital preservation rather than maximizing gains.

The collar is effectively a covered call combined with a protective put. The call premium funds the put cost, often creating a structure where you receive a small net credit or pay minimal net debit. This financing efficiency is what makes collars attractive compared to buying protective puts outright, which can be expensive over time.

Strike selection determines how much protection versus upside you get. A tight collar (strikes close to the current price) provides maximum protection but almost immediately caps upside. A wider collar (strikes further away in both directions) allows more movement before the protection or cap kicks in. Most institutional collar users target asymmetric structures—slightly wider call strikes than put strikes—to keep more upside while still getting meaningful protection.