Collar: Own the Stock, Cap Both the Risk and the Upside
You own a stock but fear a crash. A collar lets you hedge it: sell a call above the current price, use the credit to buy a put below. Your downside is protected, your upside is capped, and the hedge may be free or even net credit.
- Exactly what you own and what you sell and buy to hedge
- The payoff: downside protected by a put, upside capped by a call
- Your numbers: max profit, max loss, and the cost or credit of the hedge
- When a collar is the right hedge, and when to own the stock naked instead
A collar is insurance on a stock you love. You own it, but you fear a crash. So you buy a put to protect yourself and sell a call to pay for (or reduce the cost of) that insurance. Your downside is capped, your upside is capped, and often the hedge is free or even profitable upfront.
What You Actually Do
You own 100 shares of Apple at $200. You fear a 10% drop (to $180), but you think long-term the stock will rise. You buy one $190 put for $2 a share, $200 and sell one $210 call for $3 a share, $300.
Your net credit: $300 minus $200 = $100. You either pay $100 or collect $100 depending on the prices. Your downside is protected at $190. Your upside is capped at $210. That is the collar: a hedged position with defined boundaries.
The Payoff, Drawn
Drag the slider to see how you do at every ending price for Apple (at expiration).
The shape shows the hedge at work. Below $190, flat: the put protects you and losses stop. Between $190 and $210, a ramp up: you profit with the stock dollar for dollar. Above $210, flat: the call caps you and you stop profiting. In the middle, around $200, the stock stays and the $100 credit is pure gain.
The Hedge: Peace of Mind on a Dip
A collar is how long-term stock holders sleep at night.
You believe in the company. You think it will be higher in a year. But you fear a quarterly earnings miss or a market crash. A collar lets you own the stock, keep the long-term upside, and sleep through the dip. The call you sell pays for most or all of the put. You get downside insurance for free or near-free. And you cap your loss to an amount you can live with.
The only cost: if the stock soars past the call strike, you miss the extra profit. The call is called away and you sell at the cap.
When a Collar Fits
- You own a stock you believe in long-term
- You fear a near-term crash and want peace of mind
- You can live with capped upside to fund the protection
- You expect the stock to soar far above the call strike
- The put cost is very high relative to the call credit
- You hate capped upside and want unlimited gain
A collar is for the believer in a stock who wants to hedge against near-term chaos. It is not for the trader expecting a quick explosion to the upside.
A Worked Example
Walk the same trade through three endings: you own at $200, buy the $190 put for $2, sell the $210 call for $3, netting $100 credit.
Apple crashes to $175. Your put is in the money by $15 ($1,500). Your 100 shares are worth $17,500. Your put is worth $1,500. Your call is worthless. Your total position (stock + put) is worth $17,500 + $1,500 = $19,000. You paid $20,000 ($200 × 100), plus the $200 put cost, minus the $300 call credit = $19,900 net invested. Your loss is $900. But you paid $100 upfront for the put, so your real P&L is a $300 loss. The $190 put floor saved you $1,500.
Apple stays at $200. Your 100 shares are worth $20,000. Your put and call are both out of the money and worthless. You collect the $100 credit. Your profit is $100. You own the stock at cost and collect a hedge credit. This is the collar at its best.
Apple soars to $220. Your shares are worth $22,000, a $2,000 gain. But your call is in the money by $10, and it is called away. You must sell at $210, so you cap at $1,000 profit (the $210 sale, minus $200 cost). Your put is worthless. Net profit: $1,000 minus the $100 you paid upfront (or plus the $100 if you collected credit) = $900 to $1,100 profit. You missed the $2,000 gain because the call capped you.
That is the collar in three outcomes: protected loss on a crash, small gain on a hold, and capped gain on a soar.
- A collar is owning a stock, buying downside protection, and selling upside to fund that protection.
- Max profit is the call strike; max loss is the distance to the put strike, minus the net credit or plus the net debit.
- The call credit may fully offset the put cost, making the hedge free or even profitable upfront.
- It fits long-term stock holders who want to sleep through near-term crashes while keeping the long-term gain.
Pop Quiz
Two quick checks. Pick an answer and the explanation shows up right away.
You own 100 Apple shares at $200. You buy a $190 put for $2 and sell a $210 call for $3. What is your max profit?
Your max profit is capped by the call at $210 per share, or $1,000 for 100 shares. Above $210, the call is called away and you sell at the cap.
In that same collar, what is your max loss?
Your loss is capped by the put at $190 per share. You own at $200, protected at $190, so max loss is $10 per share or $1,000 for 100 shares. But you collected a $100 credit, so net max loss is $300.
Bottom Line
A collar is the hedge for the long-term stock holder. You own the stock, you believe in it, but you fear the near-term crash. Buy downside protection, sell upside to pay for it, and sleep well knowing your losses are capped and your long-term thesis is still intact. Master the collar and you have the tool to own stocks without fear. Reach for it whenever you own a stock you love but want peace of mind on a dip.