Collar Strategy
An options strategy that caps both the upside gain and downside loss of a stock position by combining a protective put with a short call.
What is Collar?
A collar strategy is an options hedge constructed by holding a long position in a stock, buying a protective put option (which floors the downside), and simultaneously selling a covered call option (which caps the upside). The premium received from selling the call partially or fully offsets the cost of the put, making the collar a low-cost or zero-cost hedge. Collars are popular with executives who hold concentrated positions in company stock and want to protect against a decline while limiting the tax consequences of selling shares. The trade-off is that any stock appreciation above the call strike is forfeited to the call buyer.
Example
An investor holds 1,000 shares of a stock at $100. To hedge through an earnings announcement, they buy the $95 put for $2.00 and sell the $110 call for $2.00, creating a zero-cost collar. If the stock falls to $80, the put limits the loss to $5 per share. If the stock rallies to $120, the call caps the gain at $10 per share. The investor sacrifices the rally above $110 to fund downside protection.