Collar Strategy: Covered Call with Protective Put
The collar strategy combines a covered call with a protective put on the same stock, capping both upside and downside. It's the favorite strategy of investors who want to keep long stock for tax or dividend reasons but can't stomach full downside exposure — especially through earnings, FDA decisions, or other binary events.
How the collar works: covered call + protective put
Three positions on the same stock, held simultaneously:
- Long 100 shares of the underlying (the "stock leg").
- Short 1 call above the current price (the covered call leg).
- Long 1 put below the current price (the protective put leg).
The short call collects premium. The long put pays premium. When the two premiums cancel out, you have a zero-cost collar — pure insurance on your long stock without any net options cost. The collar works because call and put premium at similar distances from the current price are usually similar thanks to put-call parity.
Collar strategy example
You own 100 shares of XYZ at $100. You're long-term bullish but worried about a 30-day binary event (earnings).
- Sell a $110 covered call for $2.00 premium → collect $200.
- Buy a $90 protective put for $2.00 premium → pay $200.
- Net options cost: $0 (zero-cost collar).
- Outcome A (XYZ finishes $95): both options expire worthless. You still own 100 shares at $95. Net P/L: $-500 on shares, $0 on options = $-500.
- Outcome B (XYZ drops to $80): call expires, put is in the money. You sell shares at $90 via the put. Loss: $1,000 on shares (capped at the put strike). Without the collar: $2,000 loss.
- Outcome C (XYZ rips to $130): put expires, call is in the money. Shares called at $110. Gain: $1,000 (capped at the call strike). Without the collar: $3,000 gain.
The collar cut your max upside from $3,000 to $1,000 and your max loss from $2,000 to $1,000. It converted an asymmetric bet (unlimited upside / $10,000 downside to zero) into a tight range ($1,000 either way). For many investors, that's a worthwhile trade around uncertain events.
Strike selection for the collar
Three common approaches to picking collar strikes:
- Zero-cost collar: find a put/call pair where the premiums cancel out. Usually a ~0.25-delta short call paired with a ~0.20-delta long put. No net debit, no net credit.
- Credit collar: pick a call strike closer to the money (higher premium) than the put strike. You collect a small net credit, but give up more upside. Good when you're leaning bearish.
- Debit collar: pick a put strike closer to the money (higher premium) than the call. You pay a small net debit for tighter downside protection. Good when you expect a sharp drop but want to stay long.
When to use a collar
Perfect fit:
- Long-term holding with large unrealized gains — selling triggers tax, collar locks in value
- Dividend-paying stock you want to keep collecting from while hedging
- Employer stock / restricted stock you must hold but want to protect
- Pre-earnings or FDA/regulatory binary catalyst on a stock you still believe in
- Retirement accounts where you want downside defined
Poor fit:
- Pure income trades — a plain covered call collects more premium without paying for puts
- Short-term bullish thesis — the call cap hurts you
- Very low-volatility stocks — the put is expensive relative to the protection
Related strategies
Collar Strategy FAQ
What is the collar options strategy?
The collar strategy combines three positions on the same stock: (1) long 100 shares, (2) short a call option above the current price (the covered call leg), and (3) long a put option below the current price (the protective put leg). The covered call generates premium, the protective put caps downside, and the net cost of the options is usually near zero — earning it the nickname "zero-cost collar."
How does a collar with covered call and protective put work?
You own 100 shares of XYZ at $100. You sell a $110 covered call for $2 and buy a $90 protective put for $2. Net options cost: zero. Over the next 30 days, your shares are "collared" between $90 (put floor) and $110 (call ceiling). If XYZ rallies to $120, your shares are called at $110 (capped upside). If XYZ drops to $80, your put lets you sell at $90 (capped downside). If XYZ finishes between $90 and $110, both options expire worthless and you keep the shares.
Is the collar strategy bullish or bearish?
The collar is mildly bullish with a strong risk-management tilt. You want the stock to drift upward toward the call strike (so the call stays out of the money and you keep the upside up to the strike) while limiting your exposure to a crash via the put. It's not a pure income strategy like a covered call — you're explicitly paying for insurance with put premium.
Covered call vs collar — which is better?
A covered call gives you premium income and uncapped downside (shares can fall to zero). A collar gives you premium income, capped downside (via the put), but also capped upside (via the call) AND you pay put premium that reduces net income. Use a collar when you own appreciated stock and want to lock in gains while staying long for tax or sentimental reasons. Use a plain covered call when you're willing to accept downside risk for higher net premium.
How do I pick the strikes for a collar?
Most collar traders pick a call strike 5–10% above the current price (captures some upside, generates premium) and a put strike 5–10% below (limits downside without paying too much premium). For a zero-cost collar, pick a put strike where the put premium equals the call premium. A 0.25-delta short call against a 0.20-delta long put is a common starting point.
What's the max profit and max loss on a collar?
Max profit = (call strike − stock cost basis) + net premium received. Max loss = (stock cost basis − put strike) + net premium paid. The collar strictly bounds both. For $100 stock with $110 call and $90 put at zero net cost: max profit $1,000 on 100 shares (if assigned at $110), max loss $1,000 on 100 shares (if put exercised at $90).
Is the collar strategy allowed in an IRA?
Yes. Both the covered call leg and the protective put leg are IRA-eligible with Level 2 options approval. The collar is actually one of the more IRA-friendly strategies because it's fully risk-defined — something most IRA custodians reward with lower margin requirements.
When should I use a collar instead of just selling my stock?
Three common reasons: (1) Taxes — selling would trigger a huge capital gain, collaring lets you defer while locking in most of your downside. (2) Dividends — selling costs you future dividend income; collaring keeps you long. (3) Sentimental or employer stock — you want to stay invested but cap risk during a binary event (earnings, FDA decision, regulatory ruling).
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