Collar Strategy

TL;DR: A collar protects your stock position by buying a put for downside protection and selling a call to offset the cost, creating a defined range of outcomes.

A collar strategy involves three components: owning 100 shares of a stock, buying a protective put below the current price, and selling a covered call above the current price. The put establishes a floor — no matter how far the stock drops, you can sell at the put strike. The call generates premium to help pay for the put, but caps your upside at the call strike. When the premium from the short call fully offsets the cost of the long put, it is called a zero-cost collar.

Collars are particularly valuable for concentrated stock positions, such as RSU grants or large holdings in a single company. If a significant portion of your net worth is tied to one stock, a collar lets you stay invested (preserving potential gains up to the call strike and any dividends) while eliminating catastrophic downside risk. This makes it a popular strategy around earnings announcements or during periods of elevated implied volatility when put protection is expensive and call premium is rich enough to offset it.

The tradeoff is straightforward: you give up unlimited upside in exchange for defined downside. If the stock rallies past your call strike, you miss those gains. If it crashes below your put strike, you are fully protected. Use StockShield to model collar structures and find the right balance between protection level and upside cap for your specific position.