Collar Strategy

A collar strategy involves holding shares of the underlying stock while simultaneously buying an out-of-the-money put option (for downside protection) and selling an out-of-the-money call option (to finance the put). The premium received from selling the call partially or fully offsets the cost of buying the put, sometimes creating a "zero-cost collar." The strategy creates a defined range of outcomes: the put sets a floor on losses while the call caps potential gains. Collars are commonly used by executives and large shareholders who want to protect concentrated stock positions without selling, or by conservative investors seeking to protect gains. The strategy is essentially a covered call combined with a protective put.