Collar
Own shares, buy a put for protection, sell a call to finance it — capping both gain and loss.
Profit / Loss Diagram
Collar at expiration
What is this strategy?
The Collar is a defensive strategy that turns a stock position into a structure with capped risk and reward on both sides. It is built by owning 100 shares, buying 1 OTM put for downside protection, and selling 1 OTM call to finance that put. The result is a position where your maximum gain is capped at the call strike but your maximum loss is capped at the put strike. It suits investors who want protection but do not want to pay cash for it.
The main appeal of the Collar is that the cost is low or zero: the premium received on the short call typically finances part or all of the premium paid for the long put. That makes the protection effectively free. For example, if you own 100 shares of AAPL at $175, buy the 170 put and sell the 185 call, a fall to $160 caps your loss at $500 — (175 − 170) × 100 — instead of the $1,500 you would lose unprotected. A rise to $200 caps your gain at $1,000 — (185 − 175) × 100. The net premium of the collar is then added to or subtracted from both figures.
The Collar is extremely popular among long-term investors holding shares with significant gains who want to lock those gains in without selling. It is the most efficient way to buy put protection without paying premium out of pocket. The trade-off is capping your upside, but for many investors a secured gain beats unlimited gain with downside risk. It is particularly common after large market rallies.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| OWN | 100 Shares | N/A | N/A | +100 AAPL @ $175 |
| BUY | 1 Put | OTM 3-5% | 6-12 months | +1 AAPL Jan 170 Put |
| SELL | 1 Call | OTM 5-7% | 6-12 months | -1 AAPL Jan 185 Call |
Example
Scenario: you own 100 AAPL bought at $165, now trading at $175. You want protection without selling.
- Shares Owned +100 AAPL @ $175 = $17,500
- Put Purchased (protection) +1 AAPL Jan 170 Put @ $2.00
- Call Sold (financing) -1 AAPL Jan 185 Call @ $3.50
- Net Credit +$150 (350 − 200)
- Maximum Gain $1,150 ((185 − 175) × 100 + $150 credit)
- Maximum Loss $350 ((175 − 170) × 100 − $150 credit)
- Breakeven $173.50 (175 cost − 1.50 credit per share)
- If AAPL = $195 $1,150 (gain capped at the 185 strike of the sold call)
The Greeks
Delta is positive but limited by the short call. It builds toward the call strike and then stops.
The short call’s positive theta offsets the long put’s negative theta. A small net benefit from the passage of time.
The long put’s positive vega partly cancels the short call’s negative vega. Almost neutral to volatility.
The sold call contributes negative gamma and the purchased put a positive gamma that partly offsets it. The net effect is small: the position is mostly linear.
Position Management
- 01 Choose Strikes Carefully The put should sit out of the money relative to your entry cost, or slightly in the money if you want maximum protection. The call should sit where you would be happy to be called away — your price target.
- 02 Monitor Call Assignment If AAPL rises above the call strike you could be assigned. That is not a bad outcome: it means your shares sell at your target price.
- 03 If It Falls Below the Put Strike If AAPL drops below 170, your put is in the money. You can exercise to sell at 170, capping the loss, or hold knowing the loss will not deepen.
- 04 Renew Periodically Many investors renew collars every 6–12 months. As AAPL moves, adjust the put and call strikes to new appropriate levels.
- 05 Consider Rolling on a Big Move If AAPL rises to $190 your call is at risk of assignment. If you want to keep the shares, roll the position to later, higher calls.