Collar
StrategyLevel: Intermediate
A collar is a position of 100 shares, one put bought with a strike price below the stock price and one call written with a strike price above it. The put sets a floor under the loss and the call sets a ceiling on the gain.
Key points
- The bought put limits the loss of the shares below its strike price, and the written call limits their gain above its strike price.
- The premium received for the call pays for all or part of the put, so a collar is opened for a small net debit, a small net credit or nothing.
- The floor and the ceiling hold until the options expire. After that the shares are unprotected again.
- The written call can be assigned on any business day, and the shares are then sold at its strike price.
At a glance
| Outlook | Holding a stock and wanting to limit its loss for a period, at the price of limiting its gain |
|---|---|
| Setup | Own 100 shares, buy 1 put below the stock price and sell 1 call above it, usually with the same expiration date |
| Maximum gain | The call strike less the cost of the shares, plus the net premium received or less the net premium paid |
| Maximum loss | The cost of the shares less the put strike, less the net premium received or plus the net premium paid |
| Break-even at expiration | The cost of the shares less the net premium received, or plus the net premium paid |
| Time decay | Small, because the decay of the put and the decay of the call offset each other |
| Volatility | Small, because the two options react in opposite directions |
| Assignment risk | The call can be assigned on any business day, most often before an ex-dividend date |
| Capital needed | The price of 100 shares, plus the net premium if the put costs more than the call pays |
On this page
A collar puts a range around shares that are owned. For the life of the two options the loss of the position has a known limit, and so has its gain.
What a collar is
A collar has three parts, all on the same stock.
| Part | What it does |
|---|---|
| 100 shares, owned | The position that is being protected |
| 1 put bought, strike price below the stock price | A protective put: the right to sell the shares at the put strike |
| 1 call written, strike price above the stock price | A covered call: the obligation to sell the shares at the call strike |
The two options usually have the same expiration date. The put costs a premium and the call pays one. The difference is the net premium of the collar, which can be paid, received or zero. The strike price of the put is called the floor of the position and the strike price of the call its ceiling.
How a collar makes and loses money
At expiration the position ends in one of three ranges.
- The stock is below the put strike. The put is exercised and the shares are sold at the put strike. This is the floor: the result is the same at every price below it.
- The stock is between the two strikes. Both options expire worthless. The result is the gain or loss of the shares, plus or less the net premium.
- The stock is above the call strike. The call is assigned and the shares are sold at the call strike. This is the ceiling: the result is the same at every price above it.
- 100 shares alone
- Collar
| Stock price at expiration | 100 shares alone, per share | 100 shares alone, per contract | Collar, per share | Collar, per contract |
|---|---|---|---|---|
| $35 | -$15 | -$1,500 | -$4.55 | -$455 |
| $45 | -$5 | -$500 | -$4.55 | -$455 |
| $49.55 | -$0.45 | -$45 | $0 | $0 |
| $50 | $0 | $0 | +$0.45 | +$45 |
| $55 | +$5 | +$500 | +$5.45 | +$545 |
| $65 | +$15 | +$1,500 | +$5.45 | +$545 |
Example of a collar
What happens to a collar before expiration
Between the two strikes the position moves with the stock, more slowly than the shares alone, because the put gains and the call loses when the stock falls, and the reverse when it rises.
Time and implied volatility have little effect on a collar. The put that was bought loses time value and the call that was written loses it too, and the two effects offset each other in part. The same holds for a change in implied volatility.
The floor and the ceiling are exact on the expiration date only. Before it, a collar on a stock that has fallen below the put strike shows a loss somewhat different from the floor, because both options still have time value.
What happens when a collar is assigned or exercised
The written call can be assigned on any business day. An early assignment is most likely just before the stock goes ex-dividend. The shares are then sold at the call strike, and the put that was bought remains. It can be sold for what it is worth.
The put is the holder's right. The holder decides whether to exercise it, and at expiration a put in the money is exercised automatically unless the holder instructs otherwise. The shares are then sold at the put strike.
In both cases the shares are gone, and a position that was meant to keep a stock has sold it. A sale of shares can have tax consequences, which this library does not cover.
How a collar position is managed
| Action | What it does | What it costs |
|---|---|---|
| Hold to expiration | Both options end. The shares are kept between the strikes and sold outside them | Nothing more |
| Close both options | Removes the floor and the ceiling and leaves the shares | The premium of the call less the premium of the put, at that time |
| Roll | Closes both options and opens a new pair with a later expiration date | Four trades, and new strikes at new prices |
| Close the call only | Removes the ceiling and keeps the floor | The premium of the call at that time |
The protection ends with the options. A collar of 90 days protects for 90 days, and keeping the floor means paying for a new put each time.
What can go wrong with a collar
The ceiling can cost more than the floor saves. A stock that rises from $50 to $80 pays the collar of the example $545, and the shares alone would have made $3,000. Protection over many periods is paid for with the large rises that are given up.
The floor lies below the price of the stock. The collar of the example still loses $455 per 100 shares, 9.1% of the cost of the shares, before the floor holds.
On stocks, puts below the market usually carry a higher implied volatility than calls at the same distance above it. A collar at no net cost then needs a call strike closer to the stock price than the put strike is, which means a ceiling that is nearer than the floor.
Questions and answers
What does a collar cost?
The put costs a premium and the call pays one. The difference is a net debit or a net credit, and it is zero when the two premiums are equal. The larger cost is not in the premiums. It is the gain of the shares above the strike price of the call, which is given up.
How is a collar different from a protective put?
A protective put is shares and a bought put. The gain of the shares stays unlimited, and the returns lag those of the shares by the premium of the put. A collar adds a written call, which pays for the put and limits the gain.
Terms used on this page
- Collar
- Shares held together with a put bought below the market price and a call written above it. The put sets a floor under the loss and the call sets a ceiling on the gain.
- Protective put
- A put bought on shares that are owned. Below its strike price the gain of the put offsets the loss of the shares, at the cost of the premium paid.
- Covered call
- A call written against 100 shares that the writer owns. The shares are delivered at the strike price if the call is assigned. It is called a buy-write when the shares are bought at the same time, and an overwrite when the call is written on shares already held.
- Put option
- An option that gives its holder the right to sell the underlying shares at the strike price. The writer of a put must buy the shares at that price if the put is assigned.
- Call option
- An option that gives its holder the right to buy the underlying shares at the strike price. The writer of a call must deliver the shares at that price if the call is assigned.
- Called away
- What happens to shares when a call written against them is assigned. They are delivered to the holder of the call at the strike price.
- Break-even
- The price of the underlying at expiration at which a position neither makes nor loses money. For a long call it is the strike price plus the premium paid; for a short put, the strike price less the premium received.
Sources
- Collar (Protective Collar), The Options Industry Council (read 29 September 2026).
- Protective Put (Married Put), The Options Industry Council (read 29 September 2026).
- Covered Call (Buy/Write), The Options Industry Council (read 29 September 2026).
- Options Glossary, The Options Industry Council (read 29 September 2026).
- April Webinar Key Takeaways: Understanding Volatility and Options Skew, The Options Industry Council (read 29 September 2026). Article of April 2026.
- Cboe Collar Indices Methodology, Cboe Global Markets (read 29 September 2026). Version 1.1 of August 2026.
- Loosening Your Collar: Alternative Implementations of QQQ Collars, Edward Szado and Thomas Schneeweis, The Journal of Trading 5 (2), 2010 (read 29 September 2026). The abstract.