A collar puts a floor and a ceiling around a stock you own. You buy a put to limit how far you can lose, and sell a call to pay for that put. The result is cheap or even free protection, with your upside capped at the call’s strike.
How it’s built
- Own 100 shares of the stock.
- Buy a put below the current price. That’s your floor.
- Sell a call above the current price. That’s your ceiling, and its premium pays for some or all of the put.
If the put costs more than the call brings in, you pay a small net debit. If the call brings in more, you collect a small credit. Set up so they cancel out exactly, it’s a “zero-cost collar”.
Max profit, max loss and break-even
| Collar | |
|---|---|
| Max profit | (Call strike − your share price) − net debit (or + net credit) |
| Max loss | (Your share price − put strike) + net debit (or − net credit) |
| Break-even | Your share price + net debit (or − net credit) |
Worked example
You own 100 shares of Apple ($AAPL) at $150 and want protection through a possible correction. You buy a $140 put for $4 and sell a $160 call for $3. Net cost: $1 a share, or $100.
- AAPL drops to $120: the shares lose $3,000, the put gains $2,000, and you’ve paid $100. Net loss: $1,100. That’s the most you can lose.
- AAPL stays at $150: both options expire and you’re out the $100.
- AAPL rises to $180: your shares are called away at $160. You make $10 a share on the stock ($1,000), less the $100 net cost, so $900. That’s the most you can make.
So for $100, your result is locked between a $1,100 loss and a $900 gain.
Another one: 100 shares of Tesla ($TSLA) at $250. Buy a $240 put for $5, sell a $260 call for $3, for a $2 net cost ($200). The worst case is a $1,200 loss ($10 + $2 a share), and the best case is an $800 gain ($10 − $2 a share) if Tesla is above $260 and the shares are called away.
When it makes sense
- You’ve had a big run in a stock and want to protect it without selling.
- You’re worried about a specific stretch, like earnings season or a Fed meeting.
- You’d like the protection of a protective put but don’t want to pay full price for it.
What to watch out for
- Capped upside. If the stock rallies hard, you sell at the call strike and miss the rest.
- Assignment. Above the call strike, expect your shares to be called away, possibly early before a dividend.
- It’s still not free. Even a zero-cost collar costs you the upside above the call.
Tips
- Put the strikes where you mean them. The put strike is the loss you can live with, and the call strike is a price you’d honestly sell at.
- Match the expiration to the worry. If you’re hedging an event, there’s no need to collar the stock for a year.
- Unwind it if the risk passes. You can buy back the call and sell the put early if things calm down.
For a side-by-side comparison, see protective put vs collar.