Collar
A low-cost hedge that boxes in your stock between a floor and a ceiling.
Definition
Collar is a three-leg position: you hold (or buy) the underlying shares, buy an out-of-the-money protective put to set a price floor, and sell an out-of-the-money call to set a price ceiling. The premium received from the call helps pay for the put, so the hedge can be cheap or even cost-free (a zero-cost collar).
Why it matters
A collar is the classic way to protect an existing holding through an uncertain period — earnings, a budget, or a volatile expiry — without selling the stock and triggering tax or losing your position. The trade-off is symmetry: you cap your downside, but you also cap your upside above the sold call strike. It is a defensive tool, not a profit engine.
Example
Suppose you own 100 shares trading at 1,000. You buy a 950 put for 15 and sell a 1,050 call for 15 — a zero-cost collar. No matter what happens by expiry, your shares cannot fall below 950 (you can sell at the put strike) or gain above 1,050 (the call caps you). Your outcome is locked between those two prices, for no net premium (illustrative figures).
See it live
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