The collar
A collar combines the two hedging trades into one: you own the stock, buy a put for downside protection, and sell a call to pay for it. The result is a position boxed in on both sides — a floor beneath you and a ceiling above — often for little or no net cost. It is the classic way to protect a large, appreciated holding cheaply.
How it is built
Three pieces: long 100 shares, one long put below the price (the floor), and one short call above the price (the ceiling that funds it). Stock at $100: buy the $95 put for $2, sell the $110 call for $1, net cost $1. Below $95 you’re protected; above $110 your shares are called away; in between you ride the stock. The short call’s premium offsets most of the put’s cost — that is the whole idea.
| Outlook | Cautiously bullish; protecting gains |
|---|---|
| Max profit | (Call strike − purchase price) − net debit = $9/share at or above $110 |
| Max loss | (Purchase price − put strike) + net debit = $6/share |
| Breakeven | Purchase price + net debit = $101 |
| Time decay (theta) | Roughly neutral — long put and short call partly offset |
You bought at $70 and the stock is now $100 — a big gain you don’t want to give back before a volatile earnings season. A collar buying the $95 put and selling the $110 call, for a net $1, locks your outcome into a $95–$110 band. You can’t lose more than a few dollars, you can’t gain more than to $110, and it cost almost nothing. For a concentrated position you’re unwilling to sell outright, that trade-off is often exactly right.
When to use it
Use a collar to protect an appreciated position you don’t want to sell — for tax reasons, conviction, or timing. It shines around known risk events and for concentrated holdings. A “zero-cost collar,” where the call premium fully pays for the put, is a common goal; the strikes you can achieve for free depend on the volatility skew between puts and calls.
Common pitfalls
Setting the ceiling too low. A tight short call funds a cheap put but caps your upside hard — you may be called away in a rally you wanted to keep.
Forgetting the call can be assigned early around dividends, ending the position sooner than planned.
What to do with this
A collar is protection you barely pay for, at the price of a capped upside. With hedging covered, the next four lessons turn to pure directional bets built from two options — the vertical spreads.
Now to pure directional trades. The bull call spread is a cheaper, defined-risk way to be bullish.
Next lesson · continue the courseOn to the bull call spread →