The collar trade provides stock ownership, with a put for downside protection, paid for by selling a call. The collar can also be used as part of a dividend capture strategy.


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Strategy: Collar

Collar Option Graph

The Outlook: Bullish. The stock must rise to have a gain.

The Trade: buy stock, buy put using the next strike price below the current stock price, sell call using the next strike price above the current stock price.

Gains when: Stock rises by the expiration date.

Maximum Gain: Limited to the strike price of the short calls - the stock buy price + the credit for the option portion of the trade.

Loses when: stock falls.

Maximum Loss : limited to the stock buy price - the put strike + the option credit.

Breakeven Calculation: Stock Price bought - option credit.

Advantages compared to stock: Stop loss.

Disadvantages compared to stock: Limited potential gains.

Volatility: after entry, increasing implied volatility is negative if the stock rises, but positive if the stock falls.

Time: after entry, the passage of time is positive if the stock rises, but negative if the stock falls.

Margin Requirement : None. Initial debit must be paid in full.

Variations: Using an ATM strike for the put costs more, provides more protection, and the stock must rise more for the entire position to be profitable. Using an ATM strike for the call gives more "downside protection" but severely limits possible gains.

Synthetic Equivalent: Bull Call, ITM.


  • This strategy might be used if you want to be a stock owner, and you want a protective floor under the stock to limit losses, and you want to pay for all or part of the cost of that protection by selling call(s).
  • The long put(s) put a protective floor under the stock, limiting the loss on the position no matter how far the stock might fall.
  • The short call(s) help pay for the put(s) but limit your potential gains as well. For this reason, the investor should not be "too" bullish on the stock. If the investor thought the example stock might go over $55 before expiration, a better strategy would be the Married Put.
  • This strategy is helpful to those who want to buy stock but are not sure of their timing. Many stocks that end up moving higher can get very volatile right around a good entry price. That can cause normal stop loss techniques to trigger and take you out of the stock. With a Collar, the investor can just relax during the life of the put, since market swings do not matter. Only where the stock is on expiration day matters.
  • A stock investor may enter all new stock positions with the Collar strategy. If the stock moves higher as expected during the life of the put, the investor can then let the put expire and possibly switch to using trailing stops to limit losses. If the stock does not move higher, the put will limit any losses on the position to the amount that was deemed acceptable on entry of the position.
  • Another use for a collar is to capture the dividend in a high yield stock. Before the ex-dividend date, a collar can be set up to limit your possible loss on the stock due to any unforeseen events. After the dividend is captured, the entire collar trade can be exited. Depending on the stock movement, there may be a loss or gain on the collar. Use an option calculator or option graphing software to be sure the trade, with entry and exit commissions and the captured dividend, has a good chance of being profitable overall. Since you are attempting to profit by the amount of the dividend, you do not care about stock movement, so you can use ATM puts and calls to set up the trade. Normally if you bought stock at $50 for instance, and sold the 50 strike call and bought the 50 strike put, there would be no overall gain or loss no matter what the stock did. But if you can capture a large dividend, it may make sense. A complicating factor with this strategy is that both puts and calls will normally be priced as if the dividend had already been paid, in other words, as if the stock was trading at a price lower than the actual current price, by the amount of the dividend.
  • During the life of the options, the position has the same profit and loss potential as the Bull Call, -1 to +1. So an alternate strategy for a stock investor would be to buy In-the-Money Long Calls and sell Out-of-the-Money Short Calls on any stock he wanted to own. If the stock rises in price as expected, the long calls can be exercised to buy the stock at the strike price of the long calls. If the stock does not rise, the loss is limited to the cost of the options. This technique has the added advantage of requiring much less investment capital up front. The investor will only need to make a large investment of capital in the stocks that he knows are working out.
  • The example Collar needs an investment of $4986 to establish. Buying the Bull Call to use the technique described above would cost about $494. If the stock then rose as expected, the long call could be exercised to buy the stock at the strike price, which would be another $4500 invested. The investor using the Bull Call technique only needs to use large amounts of capital on the stocks that are already working, and only after the fact. Using the Collar requires the full investment up front, before the investor knows which stocks are working out.


  • Since this is a bullish position, the investor is obviously expecting the stock to move higher. If the stock does not move higher, and the time to expiration gets to just a couple weeks, it is usually wise to exit the trade, taking less than the maximum possible loss.
  • If the investor is still bullish on the stock but feels he may have missed on the timing, the currently held options can be "rolled" to ones expiring in a later month.
  • If the stock moves higher as expected, the investor can close out the options, and switch to another stop-loss technique such as a trailing stop entered with his broker.


  • If the stock moves higher than the short call strike, an investor that thinks the strike price of the short call represents a good selling price for his stock can just allow his stock to be called away at expiration. The long put will expire worthless.
  • If the stock moves higher than the short call strike and the investor wants to keep the stock, he must buy back the short calls. This will result in a loss of opportunity at least equal to the amount the stock has gone over the strike. For instance, if the example stock went to 60, it would cost at least $5 to buy back the 55 strike calls, meaning the investor gives up any gains over 55.

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