A collar is a three-part options position built on top of a stock you already own. You sell a call option above the current price, collect a premium, and use part of that premium to buy a put option below the current price. The result is a position with a defined ceiling on gains and a defined floor on losses. Most traders set up a collar when they want to hold a stock through a period of uncertainty without exposing their full position to a sharp drop.

The strategy gets its name from the way the two options bracket the stock price. The short call puts a ceiling on how much you can profit if the stock rises. The long put puts a floor on how much you can lose if the stock falls. Between those two strikes, your profit or loss moves dollar for dollar with the stock. That range is the collar.

Before placing a collar, run the numbers on your specific strikes and premiums. A collar options calculator shows your max profit, max loss, and breakeven before you commit to the trade.

How to Set Up a Collar Options Strategy

A collar requires three positions, all opened at the same time on the same underlying stock.

Leg 1: Own 100 shares of stock. The collar is built on an existing long equity position. You need to already own the shares, or buy them at the same time you open the options. One options contract controls 100 shares, so the standard collar covers one lot of 100 shares.

Leg 2: Sell one out-of-the-money call. The short call generates income that offsets the cost of the put. You choose a strike above the current stock price. If the stock rises above that strike at expiration, your shares get called away at the strike price and you keep the premium. If the stock stays below the strike, the call expires worthless and you retain the premium and the shares. This is the same leg used in a covered call calculator, and the mechanics work identically here.

Leg 3: Buy one out-of-the-money put. The long put is the protective leg. You choose a strike below the current stock price. If the stock falls below that strike at expiration, you have the right to sell your shares at the strike price, limiting the loss. The put costs a premium, which is partially or fully covered by the call premium you collected. This leg works the same way as a standalone long put, providing the downside floor.

The net cost of the position is the put premium minus the call premium. If the call premium is larger, the collar generates a small net credit. If the put costs more, you pay a net debit. Many traders aim for a zero-cost collar, where both premiums are roughly equal.

Collar Payoff: Max Profit, Max Loss, and Breakeven

The collar has bounded outcomes in both directions, which is why traders use it as a hedging tool rather than a speculation tool.

Max profit is reached when the stock is at or above the call strike at expiration. Your shares get called away at the call strike, so the maximum gain on the stock position is the call strike minus your purchase price. Add the net credit (or subtract the net debit) from the options:

Max Profit = (Call Strike – Stock Purchase Price) – Net Premium Paid

Max loss occurs when the stock is at or below the put strike at expiration. You can sell your shares at the put strike, so the maximum loss is your purchase price minus the put strike, plus the net premium paid:

Max Loss = (Stock Purchase Price – Put Strike) + Net Premium Paid

Breakeven is the stock price at expiration where the position neither gains nor loses:

Breakeven = Stock Purchase Price + Net Premium Paid

If the collar is a net credit, the breakeven shifts slightly below the purchase price. If the collar is a net debit, the breakeven shifts slightly above.

Collar Options Strategy Example

Suppose you own 100 shares of a stock currently trading at $50. You are bullish on the position near term but want to limit your exposure if the stock drops sharply before expiration.

You sell the $55 call expiring in 60 days and collect $1.50 in premium. You buy the $45 put expiring in 60 days and pay $1.00 in premium. The net credit is $0.50 per share ($50 total on one contract).

Here is how the position plays out at expiration:

Stock at $60: Your shares get called away at $55. You gain $5.00 per share on the stock plus the $0.50 net credit. Total profit is $5.50 per share. You do not participate in the move from $55 to $60.

Stock at $52: Both options expire worthless. You keep your shares, which are up $2.00, plus the $0.50 net credit. Total gain is $2.50 per share.

Stock at $50: Both options expire worthless. The stock is flat and you keep the $0.50 net credit from the options.

Stock at $42: The put allows you to sell shares at $45. Your loss on the stock is $5.00 per share, offset by the $0.50 net credit. Net loss is $4.50 per share regardless of how much further the stock falls.

Summary: breakeven is $49.50, max profit is $5.50 per share, max loss is $4.50 per share. To model your own collar with different strikes and premiums, use the option collar calculator and compare outcomes across expiration dates before placing the trade.

When to Use a Collar

You hold a concentrated or appreciated position. If a large portion of your portfolio is tied up in one stock and you cannot or do not want to sell it, a collar limits your downside without triggering a taxable sale. This is one reason collars appear frequently in executive compensation planning.

You are uncertain about near-term direction. If an earnings release, regulatory decision, or macro event is coming up and you want to hold the stock through it without full exposure to a sharp move lower, the collar defines the range of outcomes before the event hits.

You want to reduce the cost of a hedge. Buying a protective put on its own can be expensive. Selling a call against the position offsets that cost. If you are already running a covered call on the position, adding a put below the current price converts that covered call into a collar with defined downside protection.

You are willing to cap your upside. The short call means you give up gains above the call strike. If the stock is already near a price target or a technical resistance level, accepting that ceiling in exchange for downside protection is a reasonable tradeoff.

Collar vs. Other Hedging Strategies

Collar vs. Protective Put

A protective put uses only two of the three collar legs: long stock plus a long put. The put provides the same downside floor as in a collar, but you keep full upside participation on the stock since there is no short call. The tradeoff is cost: the put premium comes entirely out of pocket with no call premium to offset it. A long put calculator lets you compare the cost of standalone protection against the collar’s net premium before deciding which structure fits your position.

Collar vs. Covered Call

A covered call is the other two legs without the put: long stock plus a short call. It generates income and slightly reduces your effective cost basis, but it offers no protection below the stock purchase price. If the stock falls sharply, you absorb the full loss minus the small premium collected. Adding a long put converts the covered call into a collar with a defined floor.

Collar vs. Bull Put Spread

A bull put spread is a purely options-based strategy that does not require owning the stock. It generates a credit if the stock stays above the short put strike and defines both the maximum profit and maximum loss. It is not a hedging tool for an existing stock position but works as a standalone income strategy with capped downside risk.

The collar sits between the protective put and the covered call in terms of cost and downside protection. It is not a set-and-forget trade: both legs have expiration dates and the position may need to be rolled as expiration approaches if you want to maintain coverage.