Hedging · Capped both sides
Collar
Strategy
A protective put is insurance; a collar is insurance you fund by selling away some upside. Cap the downside and the upside — often for little or no net cost.
What it is
A collar is a holding plus a protective put (floor) plus a short call (ceiling). The call premium helps pay for the put — often making the hedge nearly free — in exchange for giving up gains above the call strike.
Key facts
- Market view: long but cautious; willing to cap upside for cheap protection.
- Construction: Hold underlying + Buy 1 OTM put + Sell 1 OTM call.
- Cost: put premium − call premium (can be near zero — a "zero-cost collar").
- Max loss: limited at the put strike (the floor).
- Max profit: capped at the call strike (the ceiling).
The put floors losses; the short call caps gains and funds the put — a tight, low-cost band around your holding.
When to use it
- You hold a gain you want to protect cheaply and don't mind capping further upside.
- Ahead of an event where you want defined risk on both sides.
- When call premiums are rich enough to fund the put (low net cost).
Risks & trade-offs
- Upside is capped — a strong rally past the call strike is forgone.
- If assigned on the short call, you may have to deliver the holding.
- Strike selection sets how tight the band — and how much upside you sacrifice.
Build a collar live
Pick the put and call strikes on TradePulse's option chain and see your floor, ceiling and net cost.
Related strategies
- Protective Put — uncapped-upside insurance.
- Covered Call — income on a holding.
- Iron Condor — defined-risk range income.