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Hedging strategy3 minute read
What is an options collar?
Learn how stock, a protective put, and a covered call set a floor and ceiling for a holding
Prepared by Mark · Primary sources below
Direct answer
A collar combines long stock, a long put, and a short call on the same underlying. The put can establish a lower exit level during the option term, while the short call helps offset the put's cost but caps upside above its strike. The position has defined tradeoffs rather than full protection, and the short call can be assigned
The put and call create a range around stock
The put strike acts as the floor for the stock position during the collar's term, while the call strike is the ceiling for gains. The chosen strikes determine how much downside remains and how much upside is given up
Premium offset is a tradeoff
Premium from the short call can reduce the cost of the long put. A lower net cost is exchanged for accepting that the stock may be called away or that gains above the call strike are capped
The stock and option legs must be managed together
A collar is not three unrelated trades. The shares are needed if the short call is assigned, and the holder should understand expiration, dividends, exercise, and brokerage treatment before relying on the payoff diagram
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