Collar (options)

A collar combines three positions: long stock, a long put with a strike below the current price, and a short call with a strike above it. The put gives the investor the right to sell at the put strike no matter how far the stock falls, and the short call obligates the investor to sell at the call strike if the stock rises through it. Together they "collar" the position inside a defined range.

Suppose an investor owns stock at $50, buys a 45 put for $2, and sells a 55 call for $2. The premiums offset, producing a zero-cost collar. Below $45 the put protects the position, so the maximum loss is the $5 decline plus or minus the net premium. Above $55 the stock is called away, capping the gain at $5. Between the two strikes, the investor simply holds the stock and both options expire worthless.

Investors use collars when they hold a large, appreciated position they do not want to sell — often for tax reasons or because of a lock-up — but want to limit downside exposure through an uncertain period. The trade-off is explicit: giving up upside above the call strike is what makes the downside protection affordable. A collar is a hedging strategy, not an income strategy, even though it involves writing a call.

Collars are tested on the Series 7 and Series 9 as an advanced option strategy. Expect questions asking you to identify maximum gain, maximum loss, and break-even, or to recognize which strategy fits a customer who wants protection on a concentrated stock position at little or no net premium cost. The Series 65 covers collars more conceptually, as a suitability and risk-management tool.