COLLAR
Overview
Protect a stock position by buying a downside put floor and selling an upside call ceiling. The call premium often offsets the put cost entirely, creating a zero-cost or near-zero-cost hedge. Both maximum profit and maximum loss are locked in at entry.
What it does
You're sandwiching your stock position between two option strikes — a put floor below and a call ceiling above. The sold call funds the put, often creating zero net cost for both protections. You accept a defined range of outcomes: can't make more than the call ceiling, can't lose more than the put floor. Used extensively by executives with large concentrated positions.
Structure
buy 100 stock + buy 1 put + sell 1 call
Setup
- 1.Own 100 shares of stock.
- 2.Buy 1 OTM Put below the current price (your floor).
- 3.Sell 1 OTM Call above the current price (to fund the put).
- 4.Use the same expiration for both options.
- 5.Verify the net premium is near zero or a small credit — the sold call should largely pay for the put.
Max profit
(Call Strike − Stock Cost + Net Credit) × 100. E.g., SPY: ($445 − $430 + $0.10) × 100 = $1,510.
Max loss
(Stock Cost − Put Strike − Net Credit) × 100. E.g., SPY: ($430 − $410 − $0.10) × 100 = $1,990.
Breakeven
Stock Cost − Net Credit (or + Net Debit). E.g., $430 − $0.10 = $429.90.
When to use
When locking in large unrealized gains before earnings or macro events. Ideal for hedging a concentrated position without triggering a taxable sale.
When to avoid
When you expect a strong sustained rally — the sold call permanently caps upside above the strike.
Example trade
Stock: SPY at $430 Buy 1 SPY $410 Put at $5.80 Sell 1 SPY $445 Call at $5.90 Net Credit: $0.10 ($10) Max Loss: ($430 - $410 - $0.10) × 100 = $1,990 Max Profit: ($445 - $430 + $0.10) × 100 = $1,510 Breakeven: $430 - $0.10 = $429.90 Protected range: $410 to $445 Effectively a free hedge — the call premium pays for the put
Common mistakes
- ×Entering a collar on a stock you're actually bullish on — you're permanently capping potential gains.
- ×Choosing strikes too close together — minimal upside potential with full premium costs.
- ×Forgetting the call's assignment risk — if the stock rallies through the short strike, shares are called away.
- ×Using a collar as a permanent strategy — the cost of repeatedly rolling adds up, especially if the stock trends higher.
- ×Not considering tax implications — the hedge may disqualify certain tax treatment on the stock position.
FAQ
Can I use a collar to protect gains without selling shares?
Yes — this is a primary use case. You lock in your gain floor while avoiding a taxable sale event, though be aware of wash-sale rule nuances.
What if the stock shoots above my call strike?
Your shares will be called away at the strike price. You participate in gains only up to the call strike — any move above is surrendered.
What is a 'zero-cost collar'?
When the premium received from selling the call exactly equals the premium paid for the put, resulting in zero net premium. The protection is free in cash terms but costs upside potential.