Protective Collar
Quick Definition
A hedging strategy combining stock ownership with a protective put and covered call to create a cost-effective downside floor with limited upside.
What Is Protective Collar?
A protective collar is a risk management strategy for stockholders that combines buying a protective put (for downside protection) with selling a covered call (to offset the put's cost). The result is a position with a defined floor (the put strike) and a defined ceiling (the call strike) on potential outcomes. If the call premium exactly equals the put premium, it creates a "zero-cost collar" — downside protection obtained for free by sacrificing upside above the call strike. Protective collars are widely used by corporate insiders and executives to hedge concentrated stock positions, by portfolio managers protecting gains, and by risk-averse investors who want to stay invested while limiting downside. The strategy is equivalent to a bull call spread funded by the existing stock position. Collar width (distance between strikes) determines the tradeoff between protection level and upside participation.
Protective Collar Example
- 1Holding stock at $100: buy a $90 put for $2.50 and sell a $115 call for $2.50 — zero-cost collar protecting against drops below $90, capping gains at $115
- 2An executive with 50,000 shares of company stock at $200 places collars with $180 puts and $230 calls, ensuring the position stays between $9M and $11.5M in value
Related Terms
Collar Strategy
A protective options strategy combining a covered call and a protective put to limit both downside risk and upside potential on a stock position.
Protective Put
A hedging strategy where a stockholder buys a put option to establish a price floor, protecting against downside risk while maintaining upside potential.
Covered Call
An options strategy where an investor sells call options against shares they already own, generating income from the premium while capping upside potential.
Put Option
A contract giving the holder the right, but not the obligation, to sell an underlying asset at a specified price within a specified time period.
Call Option
A contract giving the holder the right, but not the obligation, to buy an underlying asset at a specified price within a specified time period.
Strike Price
The predetermined price at which the holder of an option can buy (call) or sell (put) the underlying asset upon exercise.
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