Protective Collar
Owning shares, buying a protective put, and selling a call to offset some or all of the put cost while capping upside.
What is a Protective Collar?
Owning shares, buying a protective put, and selling a call to offset some or all of the put cost while capping upside.
Construction
Own shares, buy a lower-strike put, and sell a higher-strike call with compatible expirations.
When it may be studied
To study a temporary band of outcomes when willing to exchange upside beyond the call strike for downside protection.
Expiration profile
Maximum risk: Defined range below stock price, plus net premium
Maximum reward: Limited by short-call strike
Break-even: Stock basis plus net debit or minus net credit
Worked example
Own shares at $100, buy a 90 put for $2, and sell a 110 call for $2. Ignoring costs, the collar creates a simplified $90 floor and $110 cap.
Key risks and limitations
The short call may be assigned early. Mismatched expirations, dividends, taxes, and execution can alter the intended hedge.
Entry and exit checklist
- Confirm contract multiplier, expiration, exercise style, settlement, and liquidity.
- Calculate the maximum loss under the intended structure.
- Review earnings, dividends, corporate actions, and other event risks.
- Define an exit, adjustment, or expiration plan before entry.
- Understand what happens if one leg is assigned or exercised early.