# Collars

> A collar holds shares, buys a protective put and sells a call to fund it. Learn the payoff, zero cost collars, strike choices and who uses this hedge.

Source: https://learn.tradelabsai.com/options/collars/  
Track: Options · Level: Intermediate · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Collars", https://learn.tradelabsai.com/options/collars/

A collar is a hedging strategy for shares you own. You buy a put to set a floor under your losses and sell a call to set a ceiling on your gains. The premium from the call pays for some or all of the put. The result is a position whose value is fenced in between two prices until expiration. Collars are popular with investors who hold large positions in a single stock, such as employees with company shares, and want protection without paying much for it.

## How it works

1. **Own 100 shares** per contract.
2. **Buy an out of the money put** below the current price: your floor.
3. **Sell an out of the money call** above the current price: your ceiling.
4. **Net cost** = put premium minus call premium. If they are equal, it is a zero cost collar.

## Payoff at a glance

| Feature | Collar |
|---|---|
| Outlook | Protect gains, accept limited upside |
| Maximum loss | (Stock cost minus put strike) + net premium paid |
| Maximum gain | (Call strike minus stock cost) minus net premium paid |
| Cost | Low, zero or even a small credit |

*Figure: A collar fences the position between the two strikes.*

## Worked example

**Example: A zero cost collar**
You own 1,000 shares at $150, bought years ago at $40. You buy ten 6 month $135 puts for $5.00 and sell ten 6 month $170 calls for $5.00. Net cost: zero.

- **Stock falls to $110:** puts are worth $25. Your position is effectively worth $135 a share. Loss from today: $15,000 instead of $40,000.
- **Stock at $160:** both options expire. You keep the $10,000 gain.
- **Stock rises to $200:** shares are called away at $170. Gain: $20,000 instead of $50,000.

For six months, the position's value is fenced between $135 and $170 a share.

## Why collars are popular

- **Cheap protection:** the call premium offsets the put cost.
- **Defer selling:** investors can protect a large gain without selling and triggering tax immediately (tax rules on hedged positions vary by country, so check with a professional). See [Trading Taxes and Capital Gains](https://learn.tradelabsai.com/industry/trading-taxes-and-capital-gains/).
- **Concentrated positions:** executives and long term holders use collars to reduce single stock risk. See [Concentration Risk](https://learn.tradelabsai.com/risk/concentration-risk/).

## Choosing strikes

| Choice | Effect |
|---|---|
| Put closer to the money | More protection, higher cost |
| Call closer to the money | More premium, less upside |
| Wider collar | More room both ways, often a net cost |
| Narrow collar | Behaves almost like cash |

Because of volatility skew, out of the money puts on stocks and indices usually cost more than equally distant calls, so a zero cost collar often has its call strike closer to the current price than its put strike. See [Volatility Smile and Skew](https://learn.tradelabsai.com/volatility/volatility-smile-and-skew/).

## A collar is a bull call spread in disguise

By put call parity, long stock plus long put plus short call has the same payoff as a bull call spread plus cash, at the same strikes. Understanding this helps compare costs and margin. See [Synthetic Positions](https://learn.tradelabsai.com/options/synthetic-positions/) and [Bull Call Spread](https://learn.tradelabsai.com/options/bull-call-spread/).

## Managing a collar

- **Roll the collar** forward at expiration to keep protection.
- **Reset strikes** after big moves, for example raising both after a rally.
- **Watch for early assignment** on the short call, especially near dividends. See [Exercise and Assignment](https://learn.tradelabsai.com/options/exercise-and-assignment/).
- **Close both legs together** if you no longer need protection.

## Common mistakes

- **Setting the call strike too low,** giving away most upside.
- **Forgetting the call can be assigned early.**
- **Ignoring tax consequences** of hedging or assignment.
- **Using collars on stocks you expect to rise strongly.**

## Frequently asked questions

### What is a collar in options?

A strategy that holds shares, buys a protective put and sells a call, limiting both losses and gains between the two strikes.

### What is a zero cost collar?

A collar where the premium from selling the call equals the cost of buying the put, so the protection costs nothing up front.

### When should you use a collar?

When you want to protect a large gain or concentrated position for a period and are willing to cap upside in exchange.

Next, see how options combine to recreate other positions in [Synthetic Positions](https://learn.tradelabsai.com/options/synthetic-positions/).

## Continue learning

- Next lesson: [Synthetic Positions](https://learn.tradelabsai.com/options/synthetic-positions/)
- Previous lesson: [Protective Put](https://learn.tradelabsai.com/options/protective-put/)
- Related: [Protective Put](https://learn.tradelabsai.com/options/protective-put/): A protective put buys a put on shares you own to limit downside. Learn the payoff, what protection costs, how to choose strikes and when hedging makes sense.
- Related: [Covered Call](https://learn.tradelabsai.com/options/covered-call/): A covered call sells a call against shares you own to collect premium. Learn the payoff, how to pick strikes, the trade offs and when the strategy works best.
- Related: [Hedging](https://learn.tradelabsai.com/markets/hedging/): Hedging means taking a position that offsets the risk of another. Learn how hedges work with options, futures and correlated assets, their costs and limits.
- Related: [Concentration Risk](https://learn.tradelabsai.com/risk/concentration-risk/): Concentration risk is the danger of having too much exposure to one asset, sector or idea. Learn how it hides in portfolios, how to measure it and how to limit it.
- Related: [Synthetic Positions](https://learn.tradelabsai.com/options/synthetic-positions/): Synthetic positions combine options and the underlying to copy another position's payoff. Learn synthetic stock, calls and puts, and why traders use them.