Strategies

Collar

A classic hedge structure for existing stock positions, where downside is limited by a long put and part of that protection is financed by a short call.

Description

What the strategy is doing

A collar combines an existing long stock position with a long put and a short call sharing the same expiration. That creates a temporary price corridor around the stock: the put sets the floor, while the call defines the upside ceiling.

The main purpose is protection rather than income. The put establishes a minimum exit level, while the short call helps offset some or most of the put cost.

In many cases the hedge can be structured as a low-cost or even near zero-cost collar if the call premium offsets most of the put cost. In that case the focus shifts away from maximizing upside and toward clearly defining the downside.

The strategy fits best when you want to keep holding the stock but temporarily want tighter downside control after a strong rally or ahead of an uncertain event.

The trade-off is simple: below the put strike the loss is limited, but above the call strike you no longer meaningfully participate in additional upside. Operationally, the short call must be monitored for assignment risk.

Because the long put and short call share the same expiration, theta and IV effects often offset each other to some degree. In practice, the most important variable is usually where the stock finishes relative to the two strikes.

You can screen for reasonable structures in the Optionist.net OWS Tools by sorting for liquidity, put distance, and enough call premium to offset the hedge.

  • Motivation Temporarily protect an existing stock position.
  • Building blocks Long stock plus long put plus short call with the same expiration.
  • Trade-off More protection than a covered call, but clearly capped upside.

Example: XYZ from Fidelity

A common teaching example uses a stock at 53.00 USD, a purchased 52 put for 2.45 USD, and a sold 55 call for 2.30 USD. The collar therefore costs a net 0.15 USD per share.

  • Net debit 2.45 minus 2.30 = 0.15 USD per share.
  • Maximum gain 55.00 minus 53.00 minus 0.15 = 1.85 USD per share, or 185 USD per contract.
  • Maximum loss 53.00 minus 52.00 plus 0.15 = 1.15 USD per share, or 115 USD per contract.
  • Break-even 53.00 plus 0.15 = 53.15 USD.

The example shows the collar clearly: below the put strike the loss is largely frozen, while above the call strike the gain is capped.

References: Options Education, Collar, Options Education, The Collar Strategy and Fidelity, What Is a Collar Position?.