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OPTIONS STRATEGIES·NEUTRAL·2 LEGS + STOCK

Collar

Long stock, short OTM call (cap upside, collect premium), long OTM put (limit downside). Often "no-cost collar" when call premium ≈ put premium.

INPUTS
Underlying price
$
Centers the payoff chart and computes P&L at this price.
Stock position
Shares
Entry
$
LEGS
Short OTM call
Type
Side
Strike
$
Qty
Premium
$
Long OTM put
Type
Side
Strike
$
Qty
Premium
$
RESULT
BE $100.00spot $100.00
$60.002 strikes$140.00
P&L at current spot (expiry)
+$0
Net debit−$10,000
Max profit+$500
Max loss−$500
Breakeven$100.00
Risk / reward1.00 : 1
Stock cost basis+$10,000
Net premium+$0
RISK PROFILE
Max profit
(Call strike − stock entry) × shares + net premium
Max loss
(Stock entry − put strike) × shares − net premium
Breakeven
Stock entry − (net premium ÷ shares)
HOW IT WORKS

How a collar works

A collar is 100 shares you own, a protective put below, and a short call above. The call premium pays for the put. Done at the right strikes the protection can cost nothing at all — which is why collars are the standard way institutions hold a concentrated position through a period they cannot risk.

The structure gives you a floor and a ceiling. Below the put strike you stop losing; above the call strike you stop gaining. Between them you simply hold the stock. You have converted an open-ended position into a defined range for a term you choose.

What you are really doing is selling the upside you probably will not need to buy the downside you cannot afford. That is a good trade when the position is large relative to the account, and a poor one when the stock is the reason you are invested at all.

WORKED EXAMPLE

A worked example

You own 100 shares of XYZ bought at $100, trading at $100 today. You buy the $95 put for $2.00 per share and sell the $105 call for $2.00 per share, both expiring in 60 days.

Net premium
$2.00 collected − $2.00 paid = $0, a zero-cost collar
Floor
$95 — losses stop here
Ceiling
$105 — gains stop here
At expiry, XYZ = $70
Put protects: −$500 total instead of −$3,000
At expiry, XYZ = $130
Called away at $105: +$500, the maximum

A $1,000 range around your basis, for no cash outlay. The $130 row is the real cost — you gave up $2,500 of upside to protect $2,500 of downside, and you had to decide which mattered more before knowing which arrived.

FIT

When a collar fits — and when it doesn't

Consider it when
  • You hold a large or concentrated position you do not want to sell, often for tax reasons.
  • You need protection through a defined window and do not want to pay for it outright.
  • You have a price at which you would happily sell — that price becomes the call strike.
Think twice when
  • The stock is your highest-conviction holding. Capping it caps the reason you own it.
  • A takeover or breakout is plausible inside the expiry — collars are painful in exactly that scenario.
  • The strikes are so tight that you have effectively sold the position without the tax treatment of having sold it.
FAQ

Common questions

What is a zero-cost collar?

One where the call premium collected exactly offsets the put premium paid. The protection costs nothing in cash — it is paid for entirely with the upside you gave away.

What is the maximum loss on a collar?

(Cost basis − put strike) × 100, adjusted for any net premium. With a $100 basis, a $95 put and zero net cost, the loss is capped at $500 per 100 shares.

How is a collar different from a protective put?

A collar adds a short call to fund the put. The put alone costs money but leaves the upside intact; the collar is cheaper or free but caps your gains at the call strike.

What happens if the stock finishes between the strikes?

Both options expire worthless and you keep the shares, having paid or received only the net premium. That is the most common outcome and it is a neutral one.

RELATED STRATEGIES
Covered call
Income · Own 100 shares, sell call against them.
Protective put
Hedged long · Stock plus a put for downside protection.
Iron condor
Neutral · Defined-risk credit, profits when stock stays in range.
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