Collar Strategy

The Collar is a conservative options strategy designed to protect unrealized gains on a long stock position while limiting upside potential. It combines a protective put and a covered call, forming a "collar" around the stock’s price. This strategy is ideal for investors who want to hedge against downside risk without liquidating their position.

Structure

• Hold 100 shares of the underlying stock
• Buy 1 OTM Put (Strike A below current price)
• Sell 1 OTM Call (Strike B above current price)
• Both options typically share the same expiration date

Profit & Loss Profile

• Max Profit: Limited to the difference between the call strike and stock purchase price, plus net premium received
• Max Loss: Limited to the difference between the stock purchase price and the put strike, minus net premium received
• Breakeven: Depends on net credit/debit from options; typically near stock purchase price ± net premium
• Greeks: Delta-positive (long stock), Vega-neutral (offsetting options), Theta-positive (short call decay)

Example

Suppose you own 100 shares of XYZ at $80. You:

• Buy 1 x $75 Put for $3.00
• Sell 1 x $90 Call for $4.50

Net credit = $1.50. Your downside is protected below $75, and upside is capped at $90. Breakeven is approximately $78.50.

Ideal Market Conditions

• Outlook: Moderately bullish or neutral
• Volatility: Elevated IV improves call premium; stable IV reduces put cost
• Use Case: Protecting gains or hedging during uncertain market periods
• Time Horizon: Short- to medium-term, aligned with option expiration

Risk Considerations

• Upside is capped—stock gains beyond call strike are forfeited
• Put protection may expire worthless if stock remains stable
• Early assignment risk on short call if in-the-money
• Requires active monitoring and potential rolling adjustments
• Tax implications if options are exercised or closed early

Summary

The Collar strategy is a prudent way to lock in profits and limit downside risk without selling your stock. It’s especially useful for investors nearing financial goals or navigating volatile markets. While it sacrifices unlimited upside, it offers peace of mind and cost-effective protection.