How does a collar option strategy work?

You own 100 shares, buy an out-of-the-money put to set a floor, and sell an out-of-the-money call to set a ceiling. The call premium offsets the put premium. At expiration your result falls somewhere between the max loss at the put strike and the max profit at the call strike.

What is a zero-cost collar?

A zero-cost collar is one where the premium received from selling the call equals the premium paid for the put, so there is no net cash outlay. It is achieved by choosing strikes with similar deltas. The trade-off is that the call strike is usually closer to the stock than you might like, capping upside more tightly.

How do you calculate max profit and max loss on a collar?

Max profit is the call strike minus the stock purchase price, minus any net debit or plus any net credit, times 100. Max loss is the stock purchase price minus the put strike, plus any net debit or minus any net credit, times 100. With stock at $100, a $95 put, a $105 call, and a $0.40 net debit, max profit is $460 and max loss is $540.

Is a collar a good strategy?

It is a good strategy for protecting an existing position through a period of uncertainty at little or no cash cost. It is a poor strategy if you expect a large rally, because the short call caps your gains. Most investors use it tactically rather than as a permanent overlay.

What happens if the stock goes above the call strike in a collar?

The call is exercised and your shares are sold at the call strike. You keep the difference between your purchase price and the strike, adjusted for the net premium, and the put expires worthless. Any gains above the call strike go to the call buyer.

What is the difference between a collar and a protective put?

A protective put is long stock plus a long put, with unlimited upside and a premium cost. A collar adds a short call that pays for the put but caps the upside. The collar is cheaper or free, while the protective put keeps all the gains if the stock rallies.

Collar Calculator & strategy guide

Stock + OptionBeginnerNeutralDefined risk

Protect stock with a bought put while financing it by selling a covered call. Caps both risk and reward.

Payoff at expiration

Worked example: XYZ at $100, 45 days to expiration

Profit Loss Breakeven

Max profit: +$460; Call strike − stock price + net credit (or − net debit)
Max loss: −$540; Stock price − put strike + net debit (or − net credit)
Breakeven: $100.40; Stock price + net debit (or − net credit)

The trade · net debit $0.40 a share ($40)

Own 100 shares at $100
Buy $95 put · $2.40
Sell $105 call · $2.00

Price this collar on SPY with today's chain — then change the ticker, strikes and expiry.

Open in Build

What is a collar?

A collar combines 100 shares of long stock with a long out-of-the-money put and a short out-of-the-money call on the same underlying and expiration. The put sets a floor under the position and the call sets a ceiling above it. The premium received from the call pays for some or all of the put, which is why the collar is often described as cheap or even free insurance.

Between the two strikes the position behaves like long stock, shifted slightly by the net premium. Below the put strike, the put gains value as fast as the stock loses it, so the loss is frozen. Above the call strike, the call loses value as fast as the stock gains, so the profit is frozen. The result is a defined range of outcomes on both sides.

The payoff diagram is a flat floor below the put strike, a rising diagonal between the strikes, and a flat ceiling above the call strike. When the call premium equals the put premium, the position is a zero-cost collar and the diagonal passes through your purchase price. Collars suit investors who want to hold a stock through a risky period while giving up some upside in exchange for a hard limit on losses.

Setup

Leg	Strike	Expiry
Long 100 shares	—	—
Buy 1 put	1 strike OTM	Near
Sell 1 call	1 strike OTM	Near

Collar example

You own 100 shares of XYZ bought at $100, and the stock trades at $100 with 45 days to expiration. You buy one $95 put for $2.40 and sell one $105 call for $2.00. The net debit is $0.40 per share, or $40 for the collar. Your outcomes are now confined to a $10 range between the strikes.

Stock at expiration	Result
$110	The call is exercised and your shares are sold at $105. Stock gain is $500, minus the $40 net debit, for a total of $460, the maximum profit. The put expires worthless.
$100.40	Breakeven. The shares have gained $40, exactly offset by the $40 net debit. Both options expire worthless. P&L is $0.
$100 (unchanged)	Both options expire worthless and the shares are flat. You lose the $40 net debit.
$85	The shares have lost $1,500, but the put is $10 in the money and worth $1,000. Net loss is $500 plus the $40 debit, or $540, the maximum loss.

Maximum profit is $460 (the $5 gap up to the $105 call strike minus the $0.40 net debit, times 100) if XYZ finishes at or above $105. Maximum loss is $540 (the $5 gap down to the $95 put strike plus the $0.40 net debit, times 100) if it finishes at or below $95. Breakeven is $100.40.

When to use a collar

You hold shares with a large unrealized gain and want to protect it through earnings or another event without selling and triggering taxes.
You are neutral to mildly bullish and would be satisfied selling the stock at the call strike if it rallies.
You want downside protection but do not want to pay the full cost of a protective put.
Implied volatility is roughly balanced between puts and calls, allowing a zero-cost or near-zero-cost structure.
Typical entries use 45 to 90 days to expiration with the put 5 to 10 percent below and the call 5 to 10 percent above the stock price.

Risks to understand

Upside is capped. If the stock rallies far past the call strike, you sell at the strike and forgo the rest of the gain, which can be much larger than the protection was worth.
Early assignment of the short call is possible when it is in the money before an ex-dividend date, forcing a sale of the shares earlier than planned.
A zero-cost collar is not truly free. The cost is the upside you give away, and in a strong bull market that cost can be large.
Wide bid-ask spreads on two option legs plus the stock can add meaningful slippage, especially on less liquid underlyings.
If the stock finishes between the strikes, both options expire worthless and you have paid the net debit and any commissions for protection you did not use.

Managing the trade

If the stock rises toward the call strike and you want to keep the shares, roll the call up and out to a higher strike in a later expiration, possibly rolling the put up at the same time to lock in gains.
If the stock falls through the put strike, you can exercise the put to exit at the floor or sell the put for its value and keep the shares with a lower cost basis.
Roll the entire collar a few weeks before expiration if you want to maintain protection, adjusting strikes to the new stock price.
If the stock sits between the strikes near expiration, let both options expire and decide whether the next period warrants a new collar or none at all.
Choose strikes with similar deltas so the put and call premiums roughly offset, keeping the net cost near zero.

Collar FAQs

How does a collar option strategy work?: You own 100 shares, buy an out-of-the-money put to set a floor, and sell an out-of-the-money call to set a ceiling. The call premium offsets the put premium. At expiration your result falls somewhere between the max loss at the put strike and the max profit at the call strike.
What is a zero-cost collar?: A zero-cost collar is one where the premium received from selling the call equals the premium paid for the put, so there is no net cash outlay. It is achieved by choosing strikes with similar deltas. The trade-off is that the call strike is usually closer to the stock than you might like, capping upside more tightly.
How do you calculate max profit and max loss on a collar?: Max profit is the call strike minus the stock purchase price, minus any net debit or plus any net credit, times 100. Max loss is the stock purchase price minus the put strike, plus any net debit or minus any net credit, times 100. With stock at $100, a $95 put, a $105 call, and a $0.40 net debit, max profit is $460 and max loss is $540.
Is a collar a good strategy?: It is a good strategy for protecting an existing position through a period of uncertainty at little or no cash cost. It is a poor strategy if you expect a large rally, because the short call caps your gains. Most investors use it tactically rather than as a permanent overlay.
What happens if the stock goes above the call strike in a collar?: The call is exercised and your shares are sold at the call strike. You keep the difference between your purchase price and the strike, adjusted for the net premium, and the put expires worthless. Any gains above the call strike go to the call buyer.
What is the difference between a collar and a protective put?: A protective put is long stock plus a long put, with unlimited upside and a premium cost. A collar adds a short call that pays for the put but caps the upside. The collar is cheaper or free, while the protective put keeps all the gains if the stock rallies.