Collar Strategy — How to Protect Your Stock Position With Options
How the Collar Works
You already own (or are buying) 100 shares. You then:
- Sell a covered call — generates premium, caps your upside at the call strike
- Buy a protective put — costs premium, floors your downside at the put strike
The premium from the call offsets (partially or fully) the cost of the put. If the call premium equals the put cost, you have a zero-cost collar.
Example
You own 100 shares of XYZ at $100. You sell the $110 call for $3.00 and buy the $90 put for $2.80. Net credit = $0.20. Your max profit is $10.20 per share (stock rises to $110 + $0.20 credit). Your max loss is $9.80 per share (stock drops to $90 − $0.20 credit). Between $90 and $110, your P&L tracks the stock plus the $0.20 net credit.
When to Use a Collar
Collars are ideal when you hold a concentrated stock position and want to protect against a large drawdown without selling shares. Common situations:
- You have large unrealized gains and want to lock in a range of outcomes
- Earnings or macro events ahead — temporary protection without selling
- You can’t or don’t want to sell — tax reasons, vesting schedules, or long-term conviction
- You want protection cheaper than a standalone protective put
Collar vs. Protective Put vs. Covered Call
| Feature | Collar | Protective Put |
|---|---|---|
| Cost | Low or zero (call funds the put) | Full put premium |
| Downside Protection | Yes — floored at put strike | Yes — floored at put strike |
| Upside | Capped at call strike | Unlimited above strike |
| Best For | Cost-conscious hedgers | Investors who want full upside |
| Net Cost | Minimal or zero | Significant premium outlay |
Choosing Your Strikes
Put strike (floor): Typically 5%–10% below current price. Determines the worst-case exit. A $90 put on a $100 stock means you accept up to a 10% loss.
Call strike (ceiling): Typically 5%–10% above current price. Determines your max upside. A $110 call means you’re willing to cap gains at 10%.
For a zero-cost collar, adjust strikes until the call premium equals the put premium. This usually means the call is closer to the money than the put, giving you slightly more downside protection than upside potential.
Key Greeks for the Collar
| Greek | Impact |
|---|---|
| Delta | Net delta is close to stock-only (slightly less due to options). The collar barely changes your directional exposure between strikes. |
| Theta | Roughly neutral — the short call decays (helps you) while the long put decays (hurts you). |
| Vega | Roughly neutral — long put benefits from higher IV, short call is hurt by it. They offset. |
Key Takeaways
- A collar combines a covered call and a protective put to create a low-cost hedge.
- Your downside is floored at the put strike and your upside is capped at the call strike.
- Zero-cost collars are possible when the call and put premiums are equal.
- Best for concentrated positions where you want protection without selling shares.
- Theta and vega are roughly neutral, making collars stable over time.
Frequently Asked Questions
What is a zero-cost collar?
A zero-cost collar is when the premium received from selling the call exactly offsets the cost of buying the put. You pay nothing for the hedge, but you accept a cap on your upside. It’s the most popular version of the collar strategy.
Can I lose money with a collar strategy?
Yes, but losses are limited. If the stock drops below your put strike, the put protects you. Your max loss is the difference between your stock purchase price and the put strike, adjusted for the net premium. You cannot lose more than this defined amount.
Does a collar make sense for long-term investors?
It can, particularly around events that create short-term risk (earnings, elections, Fed decisions). However, repeatedly rolling collars is expensive in opportunity cost because you keep capping upside. Most long-term investors use collars selectively rather than permanently.
What happens at expiration if the stock is between the two strikes?
Both options expire worthless. You keep your shares and the net credit (if any) from opening the collar. You’re back to an unhedged stock position and can open a new collar if desired.
How is a collar different from a bull call spread?
A collar involves owning shares plus options. A bull call spread is purely an options position with no stock. The collar protects an existing holding; the bull call spread expresses a directional view with defined risk and no stock ownership.