When Should You Use This Strategy?
You own the stock, want downside protection, but don't want to pay the full ongoing cost of a protective put on its own. It suits holders willing to give up some upside in exchange for largely or fully offsetting that cost with the premium from a short call.
Who Benefits Most?
Long-term holders — often with a large unrealized gain or a concentrated position — who want a defined floor and are comfortable capping the position's upside to get it near cost. It's a common structure around a single large holding rather than a diversified portfolio.
Position Setup
The Collar consists of the following legs:
- Buy 100 shares
- Buy 1 90 strike put at $2 premium
- Sell 1 110 strike call at $2 premium
Payoff at Expiration
The chart below shows profit and loss across a range of underlying prices for the default collar setup. Open the interactive calculator to change strikes, premiums, and quantities and see the shape update live.
How Profit and Loss Work
Maximum Profit: $1,000 per default position
Maximum Loss: $1,000 per default position
Break-even Points: $100
Timing & Time Horizon
30–90 days (often rolled)
Most traders enter this strategy 30–60 days before their expected move, allowing enough time for the position to develop while avoiding excessive time decay on shorter-dated options.
Capital Requirements
100+ shares; low/zero net cost
How to Manage the Position
Many collar holders roll both legs quarterly, closing the expiring put and call and opening a new pair further out in time to maintain continuous protection. If the stock finishes above the call strike, most holders accept assignment and let the shares be sold at that price, since it was the trade-off accepted when the collar was set up.
- Monitor the position daily, especially as it approaches profitability
- Set clear profit targets and exit rules before entering
- Consider closing early to lock in gains rather than waiting for max profit
- Be prepared to cut losses if the thesis is wrong
Key Risks & What to Watch
- Upside capped at call strike
- Opportunity cost if rallies past cap
Common Variations
The default setup above is one version of the collar. Traders adjust strike placement to trade off cost, probability, and payout:
Zero-cost collar
Select the call and put strikes so the premium received from the call fully offsets the put's cost.
Key difference: No net premium outlay, but the exact width of the protected range is determined by where the strikes happen to line up.
Best for: Holders who want protection without paying cash out of pocket for it.
Wide collar
Place both strikes further from the current price.
Key difference: More room for the stock to move in either direction before the floor or ceiling engages, but likely requires a net debit.
Best for: Holders who want light protection while retaining most of their upside potential.
Frequently Asked Questions
Why would I cap my upside to get downside protection?
Setup
Selling the call finances some or all of the protective put's cost, making the hedge cheaper or free — the trade-off is giving up gains above the call strike in exchange for a defined floor below the put strike.
How is a collar different from a protective put alone?
Comparisons
A protective put alone has a real, ongoing premium cost; a collar largely offsets that cost by selling a call, at the price of capping the upside a protective put alone would leave open.
What happens if my stock gets called away in a collar?
Setup
You sell your shares at the call strike, similar to a covered call, though you also still hold the protective put, which can typically be sold or allowed to expire at that point.
When do investors typically use a collar?
When to Use
Around concentrated stock positions — often after a large unrealized gain — where the holder wants downside protection without paying much cash, and is willing to cap further upside to get it.
Model Before You Trade
Every strategy performs differently based on entry price, strike selection, and premium levels. Use the interactive Collar calculator to model the payoff with your expected entry, strikes, and premiums before committing capital.
Educational information only. This guide explains how the strategy works mathematically and typically behaves. It is not investment advice, and past performance does not guarantee future results. Options trading involves significant risk, including the potential loss of premium paid. Paper trade or use small positions while learning.