Protecting Long Term Investments · Options Trading Guide
A collar funds some put protection by selling a call against owned shares. It creates both a floor and a ceiling for the covered period.
Define both boundaries
Hold shares, buy a lower strike put and sell a higher strike call with the same expiration and matching quantity. The put supports a floor. The call caps gains and can require delivery of the shares. A collar suits an objective that accepts limited upside in exchange for protection during a specified period.
Calculate a complete example
A stock is $100. Buy a 90 put for $3 and sell a 110 call for $2. The net option debit is $1 per share. For 100 shares, the combined starting amount is $10,100. At expiration below $90, the matched position is worth $9,000, giving a maximum $1,100 gross loss. At or above $110, value is capped at $11,000, giving a maximum $900 gross gain.
Distinguish premium cost from economic cost
If a call premium exactly pays for the put, the collar has zero net option premium before fees. It still gives up gains above the call strike and incurs execution costs. Moving the call strike closer can finance more protection while increasing the chance of surrendering the shares. Evaluate those choices against the investment plan rather than labelling one configuration free insurance.
Manage the share decision
American style call assignment can occur before expiration. The put does not stop the shares being called away. If the call is closed or rolled, recalculate the total cost and the remaining hedge. Taxes and account rules can affect the result and require jurisdiction specific review. Before entry, document whether sale at the call strike is acceptable, how long protection is needed and what happens when the options expire. A long term investor may reasonably choose a partial collar or no collar if the constraints conflict with the objective.
Try it yourself
Shares are valued at $60. A 55 put costs $2 and a 65 call receives $2.50. What are the expiration loss and gain limits for a matched 100 share collar?
Show the worked answer
The net credit is $50. Maximum gross loss is $500 minus $50 = $450. Maximum gross gain is $500 plus $50 = $550, before costs.
Further reading
Educational material. Examples and rates are hypothetical, not trade recommendations. Product terms, eligibility and risks vary by venue and jurisdiction.
