Collar
Own shares, buy a protective put, and sell a covered call to help pay for it. Limits both downside and upside.
Payoff at expiration
When traders use it
You want cheap protection on a stock you hold and accept capped upside.
Formulas (per share; ×100 per contract)
| Max profit | (Kcall − S) − net debit |
| Max loss | (S − Kput) + net debit |
| Breakeven | S + net debit (put − call) |
Key risks
Upside capped; shares may be called away.
How it works
Own 100 shares, buy an OTM put (floor), and sell an OTM call (ceiling). The call premium offsets the put’s cost. Your outcome at expiration is bounded between the two strikes.
Worked example HYPOTHETICAL
Hypothetical example only — not real prices or a recommendation. Own 100 shares at $100. Buy $95 put for $2.00, sell $110 call for $1.50. Net debit $0.50 ($50).
| Stock price at expiration | P/L (1 contract, excl. fees) |
|---|---|
| $80 | −$550 |
| $95 | −$550 |
| $100 | −$50 |
| $100.5 | $0 |
| $110 | +$950 |
| $120 | +$950 |
Market outlook: when to use it
Use when: Holding a stock with gains you want to protect cheaply, accepting capped upside.
Avoid when: When you expect a big rally, or you are unwilling to have shares called away.
The Greeks, in plain words
| Delta | Positive, reduced; between the strikes it behaves like reduced stock exposure. |
| Theta | Usually near zero (put decay offset by call decay). |
| Vega | Small; legs partly offset. |
| Gamma | Small. |
Choosing strikes and expiration
Choose the put at the loss you can tolerate and the call at a price you would sell. A "zero-cost collar" picks strikes so premiums net to about zero. 1–6 months.
Managing the trade
Roll the whole collar as it nears expiration. If the stock rises past the call, roll up and out or allow assignment. The short call can be assigned early (especially before ex-dividend).
Common mistakes
- Ceiling too tight, giving up most upside.
- Forgetting tax consequences if shares are called away.
FAQ
Max loss?
($100 − $95) + $0.50 = $5.50 ($550).
Max profit?
($110 − $100) − $0.50 = $9.50 ($950).
Explained simply
When would someone use this?
When you want to protect a stock position cheaply and accept a cap on gains in return.
The setup, in plain words
Own 100 shares, buy a put below the price and sell a call above it. Your outcome is fenced between the two strikes.
Max profit, max loss and breakeven
- Max profit
- (Call strike − purchase price ± net premium) × 100.
- Max loss
- (Purchase price − put strike ± net premium) × 100.
- Breakeven
- Purchase price plus any net debit, or minus any net credit.
A simple numeric example (hypothetical)
You own 100 shares at $100. Buy a $95 put for $2 and sell a $105 call for $2, a net cost of $0. The most you can lose is $500 (to $95) and the most you can make is $500 (at $105). Breakeven is $100.
The main risks, in plain words
- Upside is capped at the call strike.
- Shares can be called away early.
- Protection only lasts until expiration.
Beginner FAQ
What is a "zero-cost" collar?
One where the call premium roughly equals the put premium, so the protection costs about nothing up front.
Read next
Covered Call vs Cash-Secured Put · All Learn articles
Related strategies
Protective Put · Covered Call · Bull Call Spread
Watch: further explanation
Collar Options Trading Strategy (Best Guide w/ Examples) — projectoption
Calculators for this strategy
Options Profit Calculator · Probability of Profit Calculator