What is a collar?
Updated 6 June 2026 · by Theo Chen
A collar is an options hedge on stock you own: you buy a protective put below the price for downside cover and sell a covered call above it to fund that put. The put sets a floor under your losses and the call a ceiling on your gains — fencing the stock into a known range, usually for little or no cost.
Want to see your exact floor, ceiling and net cost? Enter your share price, put strike and call strike and the calculator returns the protected range and the cost or credit of the hedge.
Open the Collar Calculator →How is a collar built?
A collar layers two options on top of a stock position you already hold:
- 100 shares you own (often at a profit you want to protect).
- Buy a protective put with a strike below the current price. This is the insurance: it gives you the right to sell your shares at that strike no matter how far the stock falls.
- Sell a covered call with a strike above the current price. The premium you collect pays for the put — and in exchange you agree to sell your shares at the call strike if the stock rises above it.
The zero-cost collar
When the call premium you receive exactly covers the put you buy, the hedge costs nothing out of pocket — a zero-cost collar. You are not getting protection for free, though: the price you pay is the upside above the call strike. Pick a put nearer the price for a tighter floor and you will need a nearer call to fund it, giving up more upside; pick a further put for a cheaper, looser floor.
The payoff: a floor and a ceiling
- Floor = the put strike. Below it you are protected — the put lets you sell at that price however far the stock drops.
- Ceiling = the call strike. Above it your gains stop, because the shares are called away at the strike.
- In between the position behaves like the stock, adjusted by the small net cost or credit of the two options.
A worked example
You own 100 shares now worth $100. You buy the $95 put for $2.00 and sell the $110 call for $2.00 — a zero-cost collar. Your floor is $95: if the stock crashes to $80, the put still lets you exit at $95. Your ceiling is $110: if it rallies to $130, your shares are called away at $110 and you miss the rest. Between $95 and $110 you ride the stock, having paid nothing for the protection.
Own 100 shares; buy the $95 put (green) and sell the $110 call (red) — a zero-cost collar. Your floor is -$500 below $95 and your ceiling is +$1,000 above $110; breakeven $100.
When a collar makes sense
Reach for a collar when you are protecting gains in a stock you would rather not sell — to avoid a taxable event, keep collecting dividends, or simply hold through a risky stretch like earnings. It is a defensive structure: you accept a capped upside in return for a firm floor. If you only want the floor and are happy to pay for it, a plain protective put keeps your upside open.
The bottom line
A collar fences a stock you own into a known range - a protective put sets a floor and a short call pays for it - so the real cost of cheap downside protection is the upside you give up above the call strike.
Frequently asked questions
What is a collar in options trading?
A collar is a three-part position on a stock you already own: the 100 shares, a protective put bought below the current price for downside insurance, and a covered call sold above the price to pay for that put. The result is a position with a floor under your losses and a ceiling on your gains — protection in exchange for capped upside.
What is a zero-cost collar?
A zero-cost collar is one where the premium you collect from selling the call fully covers the cost of buying the put, so the hedge costs nothing out of pocket. You choose strikes — usually a put a little below the price and a call a little above — whose premiums roughly cancel. The "cost" is the upside you give up above the call strike, not cash.
When should you use a collar?
Collars suit an investor who is sitting on gains in a stock and wants to protect them without selling — for example, before an earnings report, ahead of a known risk, or to lock in a profitable position through a shaky stretch. Selling shares might trigger taxes or forfeit dividends; a collar keeps the shares while fencing the outcome into a known range.
What is the downside of a collar?
The cost of cheap protection is capped upside. If the stock rallies hard above your call strike, you stop participating — the shares get called away at the strike. A collar trades away the tail of a big rally for a firm floor under losses, so it is best when protecting gains matters more than catching the next leg up.
Does a collar cost money?
It can be a small debit, a small credit or roughly free, depending on the strikes you pick. A put closer to the price costs more (and needs a closer call to fund it); a put further away is cheaper but offers less protection. The collar calculator shows the net cost or credit and the exact floor and ceiling for any combination.
Related questions
- What is a protective put if I want to keep the upside?
- How does the covered call leg of a collar work?
- Are covered calls worth it for the income?
Related tools and guides
Set your floor and ceiling in the Collar Calculator, price the insurance leg alone with the Protective Put Calculator, or model the income leg with the Covered Call Calculator. Map the whole structure in the Payoff Diagram Builder.
Educational explainer only — not financial advice. Examples are illustrative and exclude commissions, early assignment and dividends. Confirm the mechanics and size positions to your own risk tolerance.