Collar: how the position works

Own the shares, buy a protective put, and sell a call to pay for it. The put sets a floor and the call sets a ceiling, so the outcome is fenced on both sides and the financing is close to free. It is the standard structure for holding a concentrated position you cannot sell, and it works precisely because you give up the upside you were not counting on anyway.

Market view: Neutral — hedged, bounded
Opened for: Debit or credit
Maximum profit: (K_c − cost basis) + net credit, or less the net debit.
Maximum loss: (Cost basis − K_p) + net debit, or less the net credit.
Breakeven: Cost basis + net debit, or cost basis − net credit.

How it is built

Hold 100 shares of the underlying
Buy 1 put at K_p below the market
Sell 1 call at K_c above the market, same expiry

All figures above are quoted per share and settle at expiry. A standard equity option covers 100 shares, so multiply by 100 for a single contract.

Before expiry: the Greeks

Net delta well below 1 and falling as the underlying approaches the call strike. Vega is roughly neutral because the long put and short call offset, which is what makes a collar cheap to carry compared with a bare protective put. Theta is small and can sit either side of zero depending on the strikes.

When to use it

To hold a large or restricted position through a period of risk at near-zero cost — after a lock-up, ahead of a diversification you cannot yet execute, or around a binary event. A "zero-cost collar" simply means the strikes were chosen so the premiums cancel; it is not free, the price is the upside above the call.

What goes wrong

The upside is capped. On a position that then doubles, the collar is by far the most expensive decision in the account despite having cost nothing to place.
Early assignment on the short call, especially around dividends, can force the sale you were trying to defer — sometimes with the tax consequence you built the collar to avoid.
Constructive-sale and tax rules in some jurisdictions treat a tight collar as a disposal. Take advice before using one on a low-basis holding.

A worked example

Own 100 SPY at a cost basis of 560, now 580. Buy the 560 put for 6.20, sell the 605 call for 6.05.

Net cost: $0.15 per share — $15 debit, close to zero-cost
Floor: $560 per share
Ceiling: $605 per share
Maximum profit: $4,485 ((605 − 560) × 100 − 15)
Maximum loss: $15, the net debit, since the floor equals the cost basis

Commissions, exchange fees, financing and the bid/ask spread are excluded. On a multi-leg position the spread is usually the largest of these.

Common questions

What is a zero-cost collar?

One where the call premium exactly funds the put, so no cash changes hands. The cost is real but paid in forgone upside rather than in cash, which is why the label is more flattering than the trade.

Related strategies

Educational only. This page explains how a structure behaves; it is not a recommendation to trade it. Options and futures carry substantial risk, and short and leveraged positions can lose more than the amount originally invested.