Options Blueprint
Collars
A floor and a ceiling on shares you own, often for a low net cost.
Goal Protect a stock you own at low or no cost by giving up some upside.
How it works with Stock XYZ
Setup: You own 100 shares at $50. You buy a $45 put for $1.00 and sell a $55 call for $1.00. Net cost = $0 (a “zero-cost collar” in this example). Results are shown at expiration, per 100-share contract, ignoring fees, dividends and taxes.
- XYZ falls to $30: the put lets you sell at $45. Result = −$500.
- XYZ rises to $70: the call caps you at $55. Result = +$500.
- XYZ between $45 and $55: both options expire worthless, and you simply have the stock’s gain or loss.
| At expiration | Per share | Per contract (×100) |
|---|---|---|
| Max gain | $55 − $50 + $0 = $5.00 | +$500 |
| Max loss | $50 − $45 + $0 = $5.00 | −$500 |
| Breakeven | $50.00 (because the net cost is $0) |
General formula. With a net cost (debit) of D per share: max gain = (call strike − stock price − D) × 100, max loss = (stock price − put strike + D) × 100, and breakeven = stock price + D. With a net credit, D is negative.
About “zero cost”: this example uses the simplified XYZ prices, where the $45 put and the $55 call both cost $1.00. In real markets the put often costs more than an equally distant call (skew), so many collars have a small net cost. Real prices vary.
Key risks
- Capped upside, the same as a covered call.
- Assignment on the short call, including early assignment near ex-dividend dates.
- Two legs to manage, and both expire. Rolling them to a later date (closing and reopening) costs money.
- Taxes. Collars on highly appreciated stock can raise tax questions (for example, if the floor and ceiling are very close together). This is general information only; talk to a tax professional.
What can go wrong: a rally you can’t keep
XYZ jumps to $70 on great news. Without the collar the shares would be up $2,000; with it, you are capped at +$500, and the shares may be called away at $55. The protection that felt cheap was paid for with upside.
Who tends to use it
Holders of a big position (often with a large gain) who want to sleep at night through a period of uncertainty and are okay with a capped range of outcomes.
Related glossary terms
Related Options Blueprint topic
- Collars: Protection for (Almost) Free
We’ll cover these topics in the future. See all Options Blueprint topics.
Important: please read
Educational only. Options Blueprint is general financial education. It is not financial, investment, tax or legal advice, and it is not a recommendation to buy or sell any security or to use any strategy. Nothing here is personalized to you, and viewing it doesn’t create an advisory relationship.
Options are not suitable for everyone. Options are complex and carry significant risk. They can lose money quickly, including the full amount you paid. Some strategies can lose more than the premium received or paid, and some (such as selling uncovered calls) have unlimited potential losses. Assignment can happen at any time before expiration on most stock and ETF options, and prices can gap sharply on news.
Hypothetical examples only. “Stock XYZ” and all prices, premiums and results on this page are made up for illustration. They ignore commissions, fees, bid/ask spreads, dividends, interest, margin requirements and taxes, all of which affect real results. No real tickers are used, and nothing here is a trade recommendation.
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