Collar

Shares held between a bought put and a written call: the put sets a floor, the call caps the gain, and the credit from the call pays for part of the put.

Also called Hedge wrapper, Protective collar

Outlook

Neutral

Family

Income

Level

Intermediate

Legs

3 legs

Expirations

1 expiration

Opens for

Debit

Maximum profit

Limited

Maximum loss

Limited

Requires shares

Yes

Legs at the reference strikes this page's diagrams are drawn from

Leg	Side	Contract	Ratio	How the strike is chosen
	Long	Shares	1
A	Long	Put 97.5	1	Delta 30
B	Short	Call 105	1	Delta 30

What it is

100 shares held, a put bought at A below the price, and a call written at B above it. The put is the floor, the call is the ceiling, and the credit from the call pays for some or all of the put.

It is a protective put and a covered call on the same shares at the same time, and the combination is what makes it a distinct structure: the cost that makes the protective put a drag is met by the credit that makes the covered call a cap.

The payoff

At expiration

A rising line flat at both ends: the position is capped above the call strike B and floored below the put strike A, tracking the shares between them.

Three regions:

• Below A — the put is in the money and the shares’ losses stop. The result is fixed at (A − entry price) plus the net credit or less the net debit.
• Between A and B — both options expire worthless and the position tracks the shares.
• Above B — the shares are called away at B. The result is fixed at (B − entry price), adjusted the same way.

Both ends are flat. The position between them is the shares, and outside them it is a number decided the day the collar was put on.

How it behaves before expiration

Today, before expiration

Today's value is a shallow curve between the two flat regions, with both corners rounded and the whole line closer to flat than the expiration line.

Both corners are rounded, and the whole curve is flatter than the expiration line. The long put and the short call carry time value in opposite directions, so much of what each contributes day to day offsets the other.

A collar therefore moves slowly. That is the practical difference from holding the shares: the position reaches neither end of its range until close to expiry, in either direction.

The Greeks

Delta is positive and well below 100 — the shares’ 100, less the short call’s delta, less the long put’s. A collar built at 30 delta on each side behaves like roughly 40 shares.

Gamma is small and changes sign across the range: positive near A where the long put dominates, negative near B where the short call does.

Theta is close to zero and its sign depends on the strikes. The short call decays in the position’s favour, the long put against it, and which wins is decided by the premiums, not by the structure.

Vega is likewise near zero, for the same reason: a long option and a short option in the same expiration respond to implied volatility in opposite directions.

Where it lives in the volatility environment

Practitioners describe the collar in terms of what the call pays for the put. A zero-cost collar is the case where the two premiums match exactly, and where the strikes have to sit for that to be true depends on the shape of implied volatility across strikes: when out-of-the-money puts are priced above out-of-the-money calls, the call must be written closer to the money to pay for the same floor.

What can go wrong

• Both ends are binding. A collar gives up the upside above B for the floor below A, and a strong move up ends the position at B with the shares gone.
• Early assignment on the call before an ex-dividend date removes the shares and leaves a long put against nothing.
• The floor is at A, not at the entry. Everything above A is still at risk.
• Three legs to close, not one. A partially unwound collar is one of the other two structures, with the risk profile that goes with it — and unwinding the call alone leaves an unhedged floor being paid for.
• “Zero cost” is not “no cost”. The call’s credit is paid for in forgone upside; it is a price expressed in outcomes rather than in premium.

Building it in Option Panel

Open Build Strategy and pick Collar. The structure requires stock, so the shares must already be in the trade; the builder then seeds the long put at A and the short call at B, each selectable by delta, percentage or points from the price, an offset, or an exact strike.

Choosing both wings by the same delta is the usual starting point for a symmetric collar; the resulting net debit or credit is shown before the structure is committed.

Back to the encyclopaedia · What-if analysis in the docs

Related strategies

• Protective Put — the floor without the cap, paid for in full.
• Covered Call — the cap without the floor, paid for by the shares’ downside.
• Bull Call Spread — the same bounded-both-ends shape built from two options and no shares.