Covered Call + Protective Put together on the same shares, capping profit and loss at a low cost.
The structure
A collar (Collar) wraps a stock position on both sides. You own 100 shares, buy a put below them for protection, and sell a call above them to fund that protection. The premium from the sold call pays for all or most of the purchased put.
When to use it
When you want to protect a large gain at near-zero cost and accept giving up gains above a set cap. A collared position is in effect a frozen range of outcomes: no disaster below the floor, no extra gain above the cap.
Maximum profit and loss
Both sides are capped. The maximum loss runs down to the put's floor and the maximum gain up to the call's cap, set by the net of the two premiums. A zero-cost collar means the market priced both sides about equally.
Hypothetical example
Shares at $150: buy a put with a $140 strike for a $3 premium and sell a call with a $165 strike for a $3 premium. The net is zero, and the result is held between a $10 loss and a $15 gain per share, whatever the market does.
Common mistake
Forgetting that the cap is a real obligation: a merger jump or a surprise earnings gain above the cap goes to the holder of the call you sold. A collar suits a position whose owner is content with a known range.
Why it costs close to zero
Because the premium from the call you sell funds the protection of the put floor you buy. The insurance becomes nearly free in exchange for giving up gains above a limit. This makes it a tool for someone who wants protection but does not want to sell an asset they own, for tax or long-term investment reasons.
Where to see it on the platform
The options calculator builds it from both legs and draws the capped range. The strategy guide mentions it in the context of protecting gains.
The structure calculator builds it with both legs and shows the range of outcomes fixed in advance.
