Collar
In short
Protective put + covered call — caps both downside and upside
A collar buys a put for protection and sells a call to pay for it. Your gains are capped at the call strike but losses are protected below the put strike. It's a low-cost hedge that sacrifices upside to prevent downside.
A collar combines a protective put and a covered call. Buying the put creates a floor; selling the call creates a ceiling. The call premium partially or fully offsets the put cost — making it a cheap or zero-cost hedge. Used to protect large stock positions.
Formula
Net Cost = Put Premium - Call Premium ReceivedRelated concepts
- Covered Call — You own 100 shares of Apple and sell someone the right to buy them at $200. They pay you $5 per share ($500). If Apple stays below $200, you keep the $500. If it rises above $200, you sell your shares at that price.
- Protective Put — Like buying insurance on your car. You own 100 Apple shares and buy a put at $150. If Apple crashes to $100, your put lets you sell at $150. You paid a premium for this safety net.
- Call Option — A call option is like a coupon that lets you buy a stock at today's price even in the future. If the stock rises, you profit. If it falls, you only lose what you paid for the coupon (the premium).
- Put Option — A put option is like insurance for your stocks. If you own shares and buy a put, you can sell them at the strike price even if the stock crashes. You pay a premium for this protection.