A collar strategy combines three components: owning 100 shares, selling a covered call above the current price, and buying a protective put below the current price. The covered call premium partially or fully funds the protective put, giving you downside protection at little or no cost — but capping your upside at the call strike.

How a Collar Works

Stock: XYZ at $100

  • Own 100 shares at $100
  • Sell 1 call at $110 for $2.50 (caps upside at $110)
  • Buy 1 put at $90 for $2.00 (protects below $90)

    • Net credit: $0.50 ($2.50 - $2.00)

    Your position is now bounded:

  • Max profit: $110 - $100 + $0.50 = $10.50/share (if stock ≥ $110)
  • Max loss: $100 - $90 - $0.50 = $9.50/share (if stock ≤ $90)
  • Breakeven: $100 - $0.50 = $99.50

    • No matter what happens, you can't lose more than $9.50/share or make more than $10.50/share. This is a defined-risk, defined-reward position.

    Zero-Cost Collar

    The most popular version is the zero-cost collar, where the call premium exactly offsets the put cost:

  • Sell $108 call for $3.00
  • Buy $92 put for $3.00
  • Net cost: $0

    • You've created a free insurance policy on your stock. The trade-off is a tighter upside cap.

    When to Use a Collar

    1. You have concentrated stock (RSU, inheritance, employee stock): You hold 1,000 shares of your employer's stock worth $150K. You can't sell (lockup period, tax reasons). A collar protects against a catastrophic drop while generating some income.

    2. Ahead of known risk events: Your stock reports earnings next week. Rather than sell shares, put on a 2-week collar that protects the downside through the announcement. After earnings, remove the collar.

    3. You're bullish but nervous: You think the stock has 10% upside over the next 3 months but worry about a market correction. A collar lets you participate in up to 10% gains while putting a floor on losses.

    Collar vs Just a Covered Call

    | Feature | Covered Call Only | Collar | Upside capYesYes Downside protectionPremium only (small)Put strike (significant) CostNet creditSmall credit to small debit Best forIncome generationCapital preservation | Max loss | Stock can go to $0 | Defined by put strike |

    The collar gives up some premium income in exchange for defined downside risk. If you're selling covered calls primarily for income and can handle stock declines, you don't need the put. If protecting capital is the priority, the collar is superior.

    Advanced Collar Adjustments

    Rolling the collar: As the stock moves, roll both legs. If XYZ rises from $100 to $108, close the collar and open a new one centered around $108 (sell $118 call, buy $98 put).

    Asymmetric collar: Instead of a zero-cost collar, accept a small debit to widen the range. Sell $112 call for $2.00, buy $90 put for $3.00. Cost: $1.00. But you get $12 of upside room vs $10 of downside risk.

    Collar with dividends: If the stock pays dividends, the collar lets you collect them while maintaining protection. Some investors use collars specifically on high-dividend stocks to lock in the dividend with limited downside.

    Real-World Example: Collar on NVDA Before Earnings

    NVDA at $800 before earnings:

  • Sell $860 call (7.5% OTM) for $22.00
  • Buy $740 put (7.5% OTM) for $20.00
  • Net credit: $2.00

    • If NVDA jumps to $900 on earnings: Shares called away at $860. Total gain: $60 + $2 = $62/share (7.75%). You miss the extra $40 above $860.

    If NVDA drops to $700 on earnings: Put kicks in at $740. Loss capped at $60 - $2 = $58/share (7.25%). Without the collar, you'd lose $100/share.

    If NVDA stays at $800: Both options expire worthless. You keep the $2.00 net credit and your shares.

    Setting Up Collars in Practice

    Choose the same expiration for both the call and put. Match the width to your risk tolerance — tighter collars (5% OTM on each side) have smaller ranges but lower cost. Wider collars (10% OTM) give more room but may cost a small debit.

    OptionsPilot's strike finder can help identify the optimal collar by showing the premium tradeoff at each strike, making it easy to find the zero-cost point or the width that matches your risk budget.