Collar vs Covered Call: Which Options Strategy Fits Your Trade?
A covered call and a collar both start the same way: you own at least 100 shares of a stock and sell a call against them for income. The collar adds one more piece, a protective put bought with part or all of that call premium, which sets a floor under the stock’s downside. Same starting position, one extra leg, a very different risk profile.
This guide compares both strategies side by side, walks through a worked example from each calculator’s own numbers, and links to the free tools so you can model your own strikes before placing a trade. Options trading involves risk, including the possible loss of the full amount invested.
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What Is a Covered Call?
A covered call means owning at least 100 shares of a stock and selling one call option against them. The call premium is collected up front as income, and it also lowers your effective cost basis by that amount. If the stock closes above the strike at expiration, the shares are typically called away and the gain is capped at the strike price plus the premium collected. If the stock falls, the premium provides a small cushion, but the shares themselves carry the same downside as owning the stock outright. Use the covered call calculator to see the exact credit, breakeven, and max gain for your own strikes.
What Is a Collar?
A collar takes the same covered call and adds a protective put purchased below the current stock price, funded in whole or in part by the call premium already collected. The put sets a floor: no matter how far the stock falls, losses stop at the put strike (minus whatever net premium was paid or received setting up the position). The trade-off is that the put costs money, so a collar’s net credit and max profit are usually smaller than a plain covered call on the same stock. Use the collar options calculator to see the exact net premium, breakeven, and defined max loss for your own strikes.
Collar vs Covered Call: Key Differences
| Factor | Covered Call | Collar |
|---|---|---|
| Legs | Long stock, short call | Long stock, short call, long put |
| Cash flow at entry | Net credit (the call premium) | Smaller net credit, or occasionally a small net debit |
| Max profit | Call strike minus cost basis, plus the call premium | Call strike minus cost basis, plus the smaller net premium |
| Max loss | Stock can fall toward zero, offset only by the call premium | Capped: cost basis minus put strike, minus the net premium |
| Downside protection | Limited to the premium collected | A defined floor set by the put strike |
| Upside | Capped at the call strike | Capped at the call strike, same as the covered call |
| Typical use | Generating income on a stock you are comfortable holding through a dip | Protecting an existing position or gain while still collecting some income |
The core trade-off is income versus protection. A covered call keeps the full call premium as income and accepts open-ended downside risk down to zero, cushioned only by that premium. A collar gives up part of that premium to buy a put, which turns the open-ended downside into a known, defined maximum loss. Neither strategy changes the upside cap: both are limited to the call strike, since both are short the same call.
When to Use a Covered Call
A covered call tends to fit when you plan to hold the stock regardless of a near-term pullback and want to generate income while you wait, since giving up some downside cushion for extra premium is an acceptable trade. It also fits a neutral-to-mildly-bullish outlook where you are comfortable being called away at the strike. Compared with a cash-secured put, a covered call requires owning the stock outright rather than committing cash to potentially buy it, though both aim to collect option premium on a similar directional view.
When to Use a Collar
A collar tends to fit after a stock has already made a significant gain and you want to lock in some of that gain without selling outright, particularly around an earnings report or other event where a sharp drop is a real risk. It also fits a lower risk tolerance than a plain covered call, since the defined floor matters more than squeezing out the last bit of premium. Compared with a protective put alone, a collar’s short call funds part of the put’s cost, at the price of capping the upside that a protective put by itself would leave open.
A Quick Example with Real Numbers
Covered call (from the covered call calculator‘s own worked example): you buy stock at $50.00 and sell the $55 call, collecting $1.50 per share ($150 per contract). Breakeven is $48.50 (the $50.00 cost basis minus the $1.50 premium). Max profit is $650.00 (the $55 strike minus the $50 cost, plus the $1.50 premium, times 100 shares) if the stock closes at or above $55 and the shares are called away. Below $48.50, the position runs at a loss with no floor other than the stock reaching zero.
Collar (from the collar options calculator‘s own worked example): you own stock at $100.00, sell the $105 call for $2.50 per share, and buy the $95 put for $2.00 per share. Net credit is $0.50 per share ($50 per contract). Breakeven is $99.50 (the $100.00 stock price minus the $0.50 net credit). Max profit is $550.00 (the $105 strike minus the $100 cost, plus the $0.50 net credit, times 100 shares) if the stock closes at or above $105. Max loss is capped at $450.00 (the $100 cost minus the $95 put strike, minus the $0.50 net credit, times 100 shares) no matter how far the stock falls below $95.
Different stocks and strikes, but the shape of the trade-off is the same one shown in the comparison table above: the covered call’s only floor is the small premium cushion, while the collar trades a slice of premium for a hard stop on how much the position can lose. Model both on your own numbers before deciding which one fits a specific position.
Calculate the Payoff Before You Trade
Both strategies depend on the specific strikes and premiums you use, which change the exact credit, breakeven, and max profit or loss. Use the free calculators to model the numbers for your own position:
- Covered Call Calculator – model the net credit, breakeven, and max gain for your own strikes
- Collar Options Calculator – model the net premium, breakeven, and defined max loss for your own strikes
- Protective Put Calculator – compare a pure downside hedge that skips the short call and its upside cap
- Cash-Secured Put Calculator – compare an income alternative that does not require owning the stock first
- Poor Man’s Covered Call Calculator – compare a lower-capital way to sell calls against a long-term option instead of shares