What a collar is
A collar combines three pieces: owning shares, buying a protective put, and selling a covered call. The put helps limit downside below its strike. The call generates premium that can help pay for the put, but it caps upside above its strike.
The three parts
1 · Protective put
Establishes downside protection. Below the put strike, you can sell the covered shares at the strike price.
2 · Shares
Provide market participation. The shares rise and fall with the underlying, but the put sets a floor.
3 · Covered call
Helps fund the put by generating premium, but caps upside above the call strike.
Payoff at expiration
- Below the put strike: the put lets you sell at $90, so your loss is limited to the distance from entry to the put strike (plus net costs).
- Between the strikes: the shares rise and fall with the market. Neither option is exercised.
- Above the call strike: the call caps your gain. You agreed to sell at $110, so your upside stops there.
A 100-share example
| Shares owned | 100 @ $100 entry |
| Buy 1 put | $90 strike, $3 premium = $300 paid |
| Sell 1 call | $110 strike, $4 premium = $400 received |
| Net option cost | $100 net credit |
| Maximum loss | ~$900 (entry $100 → put $90, minus $100 credit) |
| Maximum gain | ~$1,100 (call $110 → entry $100, plus $100 credit) |
Who collars suit
Collars are best suited for investors who want to retain shares while limiting downside. If you have a concentrated position or employer stock you want to keep holding but want to reduce downside risk, a collar can define a range of outcomes through expiration.
Risks to understand
- Early assignment can occur on the short call, particularly if it is in the money near expiration.
- The collar has a net debit or credit that affects the overall return. Premiums, strike selection, and expiration all matter.
- Protection applies only to the covered quantity and only through the expiration date.