What Is a Collar Strategy?
A collar strategy combines three positions: owning shares of stock, buying a protective put below the current price, and selling a covered call above the current price. The put provides downside protection while the call premium helps offset the put cost. The result is a position with both capped upside and capped downside, creating a defined-risk range for your stock investment.
Collars are popular among investors who own appreciated stock and want to protect gains without selling shares. They are especially common before uncertain events (elections, earnings seasons, market corrections) and for concentrated stock positions. The collar can often be structured for zero cost when the call premium equals the put premium.
When the premium received from selling the call equals the premium paid for the put, the collar costs nothing to implement. This is called a zero-cost collar and provides free downside protection at the expense of capping your upside at the call strike price.
Collar Formulas
- 1Net collar cost = $2.00 - $2.00 = $0 (zero-cost collar)
- 2Max profit = ($110 - $95 + $0) × 100 = $1,500
- 3Max loss = ($95 - $90 + $0) × 100 = $500
- 4Breakeven = $95 + $0 = $95 (purchase price, since collar is free)
- 5Stock above $110: shares called away, profit capped at $1,500
- 6Stock below $90: put protects, max loss = $500
- 7Stock between $90-$110: normal stock P&L
| Stock Price | Stock P&L | Put Value | Call Obligation | Total P&L |
|---|---|---|---|---|
| $80 | $-1,500 | $1,000 | $0 | -$500 (max loss) |
| $90 | -$500 | $0 | $0 | -$500 (max loss) |
| $95 | $0 | $0 | $0 | $0 (breakeven) |
| $100 | +$500 | $0 | $0 | +$500 |
| $110 | +$1,500 | $0 | $0 | +$1,500 (max) |
| $120 | +$2,500 | $0 | -$1,000 | +$1,500 (capped) |
Implementing a Collar
- Collars are the safest options strategy for stock holders
- Zero-cost collars provide free protection but cap upside
- Popular for executives with concentrated stock positions
- Can be adjusted by moving strikes as the stock price changes
- Tax-efficient: no capital gains event from implementing the collar
A narrow collar ($95 put / $105 call on $100 stock) provides tight protection but limits upside. A wide collar ($85 put / $120 call) allows more upside but provides less protection. Match the width to your risk tolerance and expected stock movement.
In the US, implementing a collar can potentially trigger the constructive sale rule if both options are too close to ATM, causing a taxable event on your stock gains. Consult a tax professional before implementing collars on stocks with significant unrealized gains.