Collar
A collar protects a stock by buying a put and selling a call, funding the insurance with the call premium. Learn how it sets a floor and a ceiling around your shares.
A collar protects a stock you own by buying a put for downside protection and selling a call to help pay for it. The put sets a floor under your shares and the sold call sets a ceiling above them, boxing your position into a protected range.
It combines two trades you already know: a protective put and a covered call. Let me show you how they team up.
A Floor and a Ceiling
Picture your stock wearing a collar that keeps it within a comfortable range. The put is the floor: it guarantees a worst-case sell price, so a crash can only hurt so much. The call is the ceiling: by selling it, you collect premium that pays for the put, but you agree to cap your gains if the stock climbs past the strike.
That is the trade at its heart. You give up some upside in exchange for cheap or even free downside protection. The premium you collect from the call offsets the premium you pay for the put, so a collar costs far less than buying protection alone.
Watch It Work
You own 100 shares of Apple at $200 and want to protect them cheaply through a nervous stretch. You put on a collar:
- Buy a $190 put for $4 a share (the floor)
- Sell a $210 call for $3 a share (the ceiling)
- Net cost: just $1 a share, or $100, far less than the put alone
Your shares are now collared between $190 and $210.
Apple crashes to $160. The put lets you sell at $190, so your loss is capped near the floor instead of the full drop. The protection held.
Apple soars to $240. The sold call caps you at $210, so your shares are called away there. You still profit up to the ceiling, but you gave up the gains above it. That is the price of the cheap insurance.
Apple drifts to $205. Both options expire worthless. You keep your shares, and the collar cost you only the small net premium.
When to Use It
A collar fits an investor who wants to stay invested but sleep at night, and does not mind capping the upside to do it cheaply.
The appeal is low-cost, sometimes near-free, downside protection. The sold call pays for most or all of the put, so you are insured without the full premium drag of a lone protective put.
The trade-off is the ceiling. If the stock rockets, you miss the gains above the call strike. That makes a collar best when you are neutral to mildly bullish, protecting profits in a holding you want to keep rather than sell. Tune the strikes so the call exactly funds the put and you get a zero cost collar.
- A collar buys a put for a floor and sells a call for a ceiling.
- The call premium pays for most of the put, making protection cheap.
- You cap the downside and the upside at the same time.
- It suits a neutral-to-mildly-bullish holder protecting a position.
Pop Quiz
Three quick questions to see what stuck. Pick an answer and the explanation shows up right away.
What two trades make up a collar?
You buy a put for the floor and sell a call for the ceiling, combining the two familiar trades.
Why does a collar cost so little?
Selling the call brings in premium that offsets the cost of buying the put, making the net cost small.
What do you give up with a collar?
The sold call caps your gains at its strike, so a big rally passes you by above the ceiling.
Bottom Line
A collar wraps your stock in a protected range: a put for the floor, a sold call for the ceiling, with the call paying for most of the put. You get cheap downside protection in exchange for giving up the upside above the call.
It is the tool for an investor who wants to hold a position but limit the risk, especially to protect gains. When the call premium fully covers the put, the whole thing can cost nothing at all.
Keep going: the floor alone is a protective put, the ceiling alone is a covered call, and the free version is the zero cost collar.