Collar
Strategy

What is a collar?

A collar is a three-part position: own the underlying, buy a put option below the current price to set a loss floor, and sell a call option above the current price to fund that put. The premium collected from the short call offsets — sometimes fully — the premium paid for the put, making the collar one of the cheapest hedges available to a long investor. The trade-off is that the short call caps your upside at the call strike.

On NSE, collars are particularly popular around index rebalancing, budget sessions and earnings seasons, when investors want to stay invested but cannot afford a large drawdown. Because NIFTY and Bank Nifty options are European-style and cash-settled, the collar works cleanly — there is no early-assignment risk on the short call, and both legs settle in cash at expiry. A collar can be structured as a zero-cost collar (net premium is zero), a credit collar (net credit received) or a small-debit collar depending on the strikes chosen.

Key takeaways

• The collar floors your downside at the put strike and caps your upside at the call strike.
• Selling the call offsets the put's premium — a collar is often near-zero cost or even a small net credit.
• The position is range-bound by design; the investor gives up potential upside in exchange for cheap or free downside protection.
• On NSE, the strategy requires owning the underlying (futures or stock) — the call is covered, so no extra SPAN margin is blocked for it.
• It is a neutral-to-mildly-bullish hedge, not a directional trade — best used when you want to protect gains, not capture a big new move.

How it works

The put leg behaves identically to a protective put: if the underlying falls below the put strike, the put's intrinsic value rises point for point to offset those losses. The call leg is the collar's key innovation: because you already own the underlying, the short call is fully covered — if NIFTY rallies above the call strike, your underlying gains offset the call obligation, leaving you with a capped but not a negative outcome. Theta works in your favour on the short call (the call decays toward zero each day), while it works against you on the long put — the two effects partially offset each other, making the collar relatively time-neutral compared with a naked option position.

The ideal collar on NSE is built with strikes equidistant from the current price — for example, buying the put 200 points below and selling the call 200 points above. If the implied volatility skew on NSE means OTM puts trade at higher IV than OTM calls (the typical volatility skew), the put premium can exceed the call premium, creating a small net debit. Conversely, if IV is unusually flat or calls are rich, you may achieve a small net credit.

The numbers that matter

Worked NIFTY example

Suppose NIFTY is near 22,500 and you hold a long NIFTY futures position. You want a collar for the monthly expiry. You buy the 22,300 put for ₹120 and sell the 22,700 call for ₹110. Net debit: ₹10 per unit, or ₹750 for 1 lot of 75 (illustrative figures).

• Max loss: (22,500 − 22,300) × 75 + ₹750 = ₹15,000 + ₹750 = ₹15,750.
• Max profit: (22,700 − 22,500) × 75 − ₹750 = ₹15,000 − ₹750 = ₹14,250.
• Breakeven: 22,500 + 10 = 22,510 — virtually unchanged, confirming near-zero cost.

NIFTY at expiry	Futures P&L	Put P&L	Call P&L	Net P&L (1 lot)
21,800	−₹52,500	+₹37,500	+₹8,250	−₹15,750
22,300 (put strike)	−₹15,000	₹0	+₹8,250	−₹6,750
22,510 (breakeven)	+₹750	−₹9,000	+₹8,250	₹0
22,700 (call strike)	+₹15,000	−₹9,000	+₹8,250	+₹14,250
23,000	+₹37,500	−₹9,000	−₹14,250	+₹14,250

Above 22,700 the short call obligation grows in lockstep with the futures gain, freezing the net P&L at ₹14,250. The collar's value is visible in the bottom row — a 500-point NIFTY rally earns the same as a 200-point rally, because the call cap has already been hit. The trade-off is explicit and intentional.

When to use it

• You hold a long position with significant unrealised gains and want to protect them without selling and triggering tax.
• You expect NIFTY to be broadly range-bound — you are not counting on a large new leg higher.
• Implied volatility is elevated, making the call premium you sell rich enough to substantially offset the put you buy.
• You want a hedge that is near-zero cost — the collar is far cheaper than a standalone protective put in most IV environments.

Risks to respect

• Capped upside: if NIFTY stages a strong rally, you will not participate beyond the call strike — this can feel costly if the move is large.
• Strike risk: if the underlying falls below the put strike early in the expiry cycle, the put may still have time value — you may need to hold until expiry or roll to capture the full floor benefit.
• Volatility skew: on NSE, OTM puts typically trade richer than OTM calls due to skew, meaning an equidistant collar often carries a small net debit rather than being truly zero-cost.
• Rollover cost: if the risk event extends beyond expiry, rolling both legs to the next expiry incurs transaction costs and spread.

Collar vs protective put

The protective put is the collar without the short call — full downside protection, unlimited upside, but you pay the put premium in full. The collar recovers most of that premium by selling the call, reducing the net cost to near zero. The choice comes down to how much you value the upside above the call strike. If a large rally is genuinely possible and you want to capture it, pay for the protective put. If you are satisfied with a bounded return range and want free (or cheap) insurance, the collar is the more capital-efficient choice.

Collar vs covered call

A covered call sells a call against the underlying to generate income, without buying a put for downside protection. It improves yield in a flat market but leaves you fully exposed to a sell-off. The collar adds the missing put leg, converting the covered call's open downside into a defined floor. Investors who are comfortable with downside exposure but want income use the covered call; those who need a hard floor use the collar.

Frequently asked questions

What is a collar strategy?

A collar combines owning the underlying with buying a put below the current price and selling a call above it. The put floors your downside, the call caps your upside, and the premiums often nearly cancel each other out for a near-zero net cost.

What is the maximum profit on a collar?

Maximum profit equals the difference between the call strike and your entry price in the underlying, adjusted for any net premium paid or received. Above the call strike, the short call obligation fully offsets any further gains.

Is a collar a bullish or bearish strategy?

Neutral to mildly bullish. The investor already owns the underlying and uses the collar to protect an existing position, not to speculate on a new directional move.

How does a collar differ from a protective put?

A protective put only buys the put, keeping unlimited upside at the full cost of the premium. A collar also sells a call to offset that premium cost, but caps upside at the call strike in return for the near-zero net outlay.

The bottom line

The collar is one of the most practical hedging tools available to NSE investors — it converts an open-ended long position into a defined range with minimal or zero net cost. You give up the tail of the upside, but you buy certainty on the downside. For investors who hold significant positions through uncertain periods and cannot afford a large drawdown, the collar is often the most rational structure: cheap, clean, and honest about its trade-offs.

Related strategies & terms

• Protective Put — the collar without the short call; full upside open, full premium paid.
• Covered Call — sell a call for income without the put floor; open downside.
• Bull Call Spread — a directional defined-risk alternative if you want upside exposure with a cap.
• Put Option · Volatility Skew · Defined Risk · Rollover