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Glossary

Collar

A collar is an options strategy that protects a stock holding by buying a protective put and selling a covered call, which limits both potential losses and potential gains within a set range.

What Is a Collar?

A collar is a hedging strategy that investors use to narrow the range of possible outcomes on a stock they already own. It combines three positions: holding the shares, buying a put option with a strike price below the current price, and selling a call option with a strike price above it. Together, these keep the value of the position within a band for as long as the options remain in place. The word is also used for price bands in trading and fixed ranges in some merger deals, but in investing it usually refers to this options strategy.

How a Collar Works

The put gives the investor the right to sell the shares at its strike price. If the stock falls below that level, the put offsets further losses. The call obligates the investor to sell the shares at its strike if the buyer chooses to exercise it. If the stock rises above that level, the investor gives up gains beyond it.

The cost of the put is partly or fully offset by the option premium received for selling the call. When the two premiums roughly match, the arrangement is often called a zero-cost collar. Because the call is sold against shares the investor already holds, it resembles a covered call.

Example

Consider a hypothetical investor who owns shares trading at 100. They buy a put with a strike of 90 and sell a call with a strike of 110, both expiring in six months. If the stock falls to 70, the put allows a sale at 90, so the loss is limited to about 10 points plus the net cost of the options. If the stock rises to 150, the call requires a sale at 110, so the gain is capped at about 10 points. Between 90 and 110, the shares move normally.

Advantages and Disadvantages

A collar makes the range of outcomes easier to define, and it can cost little or nothing to set up when the premiums offset. However, gains above the call strike are forgone. Options also expire, so the position must be renewed or replaced, and future terms may differ. The investor may also be required to sell shares early if the call is exercised before expiration, and trading costs and tax treatment can affect the overall result.

Updated October 26, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Put Option

A put option is a contract that gives the buyer the right, but not the obligation, to sell a specified amount of an underlying asset at a set price before or on a set expiration date.

Call Option

A call option is a contract that gives its buyer the right, but not the obligation, to buy a specified quantity of an underlying asset at a set price before or on a set expiration date.

Strike Price

The strike price is the fixed price at which the holder of an option can buy or sell the underlying asset, such as a stock, when the option is exercised.

Option Premium

The option premium is the price a buyer pays the seller to acquire an options contract, which the seller keeps whether or not the option is exercised.

Covered Call

A covered call is an options strategy in which an investor who owns shares sells a call option on them to collect premium, accepting an obligation to sell at the strike price if exercised.

Protective Put

A protective put is an options strategy where an investor who owns a stock buys a put option on it to limit potential losses if the share price falls.

Zero-Cost Collar

A zero-cost collar is an options strategy that pairs owning shares with buying a protective put and selling a covered call, structured so the call premium pays for the put.