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A collar is an options strategy that can be established by holding shares of an underlying stock or futures contract, purchasing a protective put and writing a covered call on the underlying. The option portions of this strategy are referred to as a combination. Generally, the put and the call are both out-of-the-money when this combination is established, and have the same expiration month. Both the buy and the sell sides of this spread are opening transactions, and are always the same number of contracts. In other words, one collar equals one long put and one written call along with owning 100 contracts of the underlying futures contract. The primary concern in employing a collar is protection of profits accrued from the underlying rather than increasing returns on the upside.[1]

A report released by the Options Industry Council (OIC) in May 2012 showed that collar strategy improved performance and reduced risk.[2]

When to Use[edit]

An investor will employ this strategy after he has accrued unrealized profits from the underlying and wants to protect these gains with the purchase of a protective put. At the same time, the investor is willing to sell his stock or futures contract at a price higher than current market price, so an out-of-the-money call contract is written, covered in this case by the underlying stock or future.


This strategy offers protection of a put. However, in return for accepting a limited upside profit potential on his underlying futures contract (to the call's strike price), the investor writes a call contract. Because the premium received from writing the call can offset the cost of the put, the investor is obtaining downside put protection at a smaller net cost than the cost of the put alone. In some cases, depending on the strike prices and the expiration month chosen, the premium received from writing the call will be more than the cost of the put. In other words, the combination can sometimes be established for a net credit - the investor receives cash for establishing the position. The investor keeps the cash credit, regardless of the price of the underlying contract when the options expire. Until the investor either exercises his put and sells the underlying contract, or is assigned an exercise notice on the written call and is obligated to sell his contract, all rights of stock ownership are retained. See both Protective Put and Covered Call strategies presented earlier in this section of the site.

Risk vs. Reward[edit]

This example assumes an accrued profit from the investor's underlying futures contract at the time the call and put positions are established, and that this unrealized profit is being protected on the downside by the long put. Therefore, discussion of maximum loss does not apply. Rather, in evaluating profit and/or loss below, bear in mind the underlying contract's purchase price (or cost basis). Compare that to the net price received at expiration on the downside from exercising the put and selling the underlying contracts, or the net sale price of the stock on the upside if assigned on the written call option. This example also assumes that when the combined position is established, both the written call and purchased put are out-of-the-money.