Put Spread Collar: A Cheaper Collar With a Coverage Gap
You want a collar's cheap or free downside protection but want to trim the cost even more. A put spread collar swaps a standard collar's single protective put for a put spread, lowering the hedge's cost further at the price of a coverage gap on a severe drop.
- Exactly what you own, sell, and buy: stock, a call, and a put spread instead of a single put
- The payoff: an even cheaper hedge than a standard collar, with a coverage gap below
- Your numbers: net cost or credit, protected range, where coverage ends
- When a put spread collar fits and how it stacks two cost-saving tricks on top of each other
A put spread collar takes a standard collar and squeezes the cost down further. A standard collar already funds its protective put by selling a call. A put spread collar goes one step further, replacing the single protective put with a put spread, using a second short put to shave the cost down even more, often turning the whole hedge into a net credit. The tradeoff stacks on top of the collar's usual capped upside: now your downside protection also has a floor.
What You Actually Do
You own 100 shares of Apple at $200. You sell one $215 call for $3 a share, $300. Instead of buying a single $190 put for $4 a share ($400), you buy that put and sell a $170 put for $1.50 a share, $150, forming a put spread.
Your net cost: $400 (long put) minus $300 (call credit) minus $150 (short put credit) = a $50 net credit. You are paid $50 to open this hedge. Your upside is capped at $215. Your downside is protected from $190 down to $170. Below $170, you are exposed again, just as in a protective put spread, but you also gave up upside above $215 to get there.
The Payoff, Drawn
Drag the slider to see how you do at different ending prices for Apple (at expiration).
The shape is a standard collar's capped range, with an added floor on the downside. Between $190 and $215, you profit with the stock. Below $190 down to $170, your loss is held near the $190 floor. Below $170, losses resume climbing at the stock's normal pace, offset only by the small credit you collected upfront.
Two Cost-Saving Tricks, Stacked
A put spread collar combines both of a standard hedge's cost-cutting techniques into one structure.
A standard collar funds its put with a call sale. A protective put spread funds its put with a lower put sale. A put spread collar does both at once: sell a call above, sell a lower put below, and use both credits to pay for the middle protective put. The result is often the cheapest hedge available, sometimes a net credit, but it also stacks two limitations: capped upside from the call, and a coverage floor from the extra short put.
The math: every dollar you save on premium by adding another short leg is a dollar of coverage you have given up somewhere else, either upside participation or downside protection depth. A put spread collar accepts both trade-offs to minimize cost.
When a Put Spread Collar Fits
- You want the cheapest possible hedge, even a net credit
- You are comfortable with capped upside from the call
- You accept a downside coverage floor from the extra short put
- You specifically fear a severe crash past the short put
- You want to keep more upside potential (skip the call sale)
- The extra legs add more complexity than the savings justify
A put spread collar is for the cost-conscious stockholder who wants the cheapest possible hedge and is comfortable giving up both upside participation and deep downside coverage to get there. It is not for traders who specifically want protection against a true market crash or who want to preserve more upside than a standard collar allows.
A Worked Example
Walk through three scenarios: you collected a $50 net credit to open the hedge.
Apple stays at $200. All three options expire worthless or near-worthless. You keep the $50 credit on top of your unrealized stock position. Best case for cost.
Apple falls to $180. Inside your protected band. Your long put is $10 ITM, your short put is worthless, your short call is worthless. Net: protected near your $190 floor, plus the $50 credit, cushioning the decline meaningfully.
Apple crashes to $155. Below your short put's $170 strike. Your long and short puts offset each other's further moves, leaving you exposed to the stock's decline from that point, cushioned only by the original $50 credit.
That is the put spread collar: the cheapest hedge in the family, at the cost of capped upside and a downside floor on the worst declines.
- A put spread collar is a standard collar with a put spread instead of a single protective put, cutting cost further.
- Often achievable for a net credit, but with both capped upside and a downside coverage floor.
- Protection stops at the short put's strike; severe declines beyond that resume at normal stock-like pace.
- It fits cost-conscious stockholders comfortable trading away both upside and deep downside coverage.
Pop Quiz
Two quick checks. Pick an answer and the explanation shows up right away.
What two techniques does a put spread collar combine to minimize hedge cost?
A put spread collar stacks a collar's call sale with a protective put spread's extra put sale, using both credits to minimize the net cost of the hedge.
What are the two things you give up to get a put spread collar's lower cost?
The call sale caps your upside, and the extra put sale caps how far down your protection reaches. Both trade-offs pay for the lower net cost.
Bottom Line
A put spread collar is the cheapest hedge in the collar family, stacking a call sale and an extra put sale to minimize the cost of protecting stock you own, often for a net credit. It fits cost-conscious stockholders willing to give up both upside participation and deep downside coverage in exchange for a nearly free hedge. Reach for it when minimizing hedge cost matters more than either full upside or full downside coverage. Avoid it if a severe crash is specifically what you are trying to protect against, since that is exactly where this hedge's coverage runs out.