The collar, explained
You own shares and want a floor under them. A put provides one but costs money. Selling a call above pays for the put — and caps the upside in exchange. The result is a position with both ends fixed.
- Construction
- Long 100 shares + long put below + short call above
- Outlook
- Holding shares, prioritising protection over upside
- Premium
- Paid on one leg, collected on another
- Complexity
- 2 of 3
What it is
A collar is a covered call with a protective put added, and the two option legs are chosen so that the premium collected from the call substantially offsets the premium paid for the put. Where they offset exactly it is called a zero-cost collar, though in practice the match is rarely perfect.
The put is the point of the structure. It gives the holder the right to sell at its strike, which puts a hard floor under the position regardless of how far the underlying falls. This is the thing a covered call conspicuously does not provide, and the difference matters most precisely when it matters most.
The cost is the upside. Above the call strike the shares are called away and the position stops participating. A collar converts an open-ended holding into one with a known best case and a known worst case — which is either exactly what you want or a poor trade, depending entirely on why you hold the shares.
How it works
Start from shares you already hold
A hundred per contract. A collar is an adjustment to an existing holding rather than a position opened from nothing.
Buy a put below the current price
The floor. A higher strike protects more and costs more; a lower one is cheaper and lets the position fall further first.
Sell a call above the current price
The financing. A closer strike collects more and caps sooner. Both legs normally share an expiry.
Check the net
Premium collected minus premium paid. Near zero is the conventional target, but there is nothing special about zero — it is simply the point at which the protection is fully financed.
The payoff
- Max profit
- $750
- Max loss
- −$550
- Break-even
- $100.50
Worked example
XYZ is a placeholder, not a real security. Every guide in this section uses it at $100 so the structures can be compared directly.
XYZ trades at $100 and you own a hundred shares. You buy the $95 put for $2.00 and sell the $108 call for $1.50. Net cost of the protection: $0.50 per share, $50.
If XYZ falls to $70, the put lets you sell at $95. The loss is $500 on the shares plus the $50 net, against $3,000 for the unprotected position. This is the whole reason the structure exists.
If XYZ rises to $130, the shares are called away at $108. The gain is $800 less the $50 net — and it would be the same at $200.
If XYZ finishes between $95 and $108, both options expire worthless and you hold the shares, having paid $50 for protection you did not need.
The band from $95 to $108 is the position. Everything outside it has been traded away, in both directions, for $50.
Both sides of it
What it gives you
- A hard floor under the position, not merely a reduced cost basis
- The call premium offsets most or all of the put's cost
- Both the best and worst cases are known at entry
- Useful for a concentrated holding that cannot easily be sold
What it costs you
- Upside above the call strike is given away entirely
- The floor sits below the current price — the gap between is unprotected
- Three positions to manage and two spreads to cross
- Both legs may need rolling if the holding is long-term
What assignment does
The short call can be assigned, delivering the shares at its strike and closing the position early — leaving a long put with nothing to protect, which would then simply be sold. The long put is never assigned against you; it is a right you hold and choose whether to exercise. Dividends are the usual trigger for early call assignment.
Frequently asked questions
- What is a zero-cost collar?
- One where the call premium collected exactly matches the put premium paid, so the protection costs nothing in cash. It is achieved by choosing the call strike that happens to produce that match, which means the strike is decided by pricing rather than by preference. There is nothing special about zero — it is one point on a continuous trade-off between how much upside you keep and how much you pay.
- How is a collar different from a covered call?
- The protective put. A covered call reduces the cost basis slightly and leaves the full downside open; a collar buys an actual floor. In a severe decline the covered call's premium is a rounding error while the collar's put does the thing it was bought to do. The collar pays for that by giving up upside and by costing a small net premium.
- When would someone use a collar?
- It is most associated with a large or concentrated holding that the owner does not want to sell — often for tax reasons, or because of a restriction — but does want to limit the risk on. It brackets the position without disposing of it. Whether it suits a particular situation depends on facts this page has no access to.
- What does the collar cost?
- In cash, the put premium less the call premium, which is usually small and can be zero or slightly positive. The real cost is the upside surrendered above the call strike, which does not appear as a line item anywhere and is only visible afterwards, in the move you did not participate in.
Related guides
These guides explain how each structure is built and how it behaves. Nothing here is a suggestion to buy or sell anything, no security is named, no figure is quoted from any market, and no structure is presented as better than another — which one suits a situation is not a question this page can answer.
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