The options collar strategy, explained

An options collar protects a stock you own with two options: you buy a put that sets the lowest price you can sell at, and you sell a call that caps your upside and pays for most or all of that put. The result is a position with a known worst case, a known best case and little or no upfront cost.

By the Stillwater teamLast updated October 2, 2026Reviewed October 2, 202616 min read

Key takeaways

A collar is three positions: 100 shares, one bought put below the price and one sold call above it.
The put strike sets your floor and the call strike sets your cap. Between them you own the stock as usual.
The call premium offsets the put, so collars are often close to zero cost, though rarely exactly.
Max loss = put strike − purchase price + net premium. Max gain = call strike − purchase price + net premium.
You give up the upside above the call, and your shares can be called away, sometimes early.
Options involve risk and are not suitable for every investor, and collars can have tax consequences.

On this page

The three legs of a collar

A collar is not one product you buy. It is three positions on the same stock, usually opened together and held together until the options expire.

1. The stock

You own at least 100 shares, because one option contract covers 100 shares. This is the position you want to keep, and the reason for everything else. Collars suit stocks you would like to go on holding but whose downside worries you.

2. The protective put

You buy one put option for every 100 shares. It gives you the right to sell at its strike price until expiration, however far the stock falls. The strike is usually out of the money, somewhat below today’s price, so you absorb the first slice of any decline and the put covers the rest. You pay a premium for it.

3. The covered call

You sell one call option for every 100 shares, with a strike above today’s price, and collect its premium up front. In exchange you take on an obligation: if the buyer exercises, you sell your shares at the call strike. The call is “covered” because you already own the shares you might have to deliver.

Put together, the put sets a floor under the position, the call sets a ceiling above it, and the call’s premium pays for some or all of the put. Add the legs one at a time to see the shape form.

Your position: 100 shares

1. Own 100 shares at $50

A straight line through breakeven at $50. Every dollar the stock moves, you make or lose $100. There is no floor and no cap.

Step 1 of 3

Choosing the strikes

Strike selection is where a collar becomes yours. Both choices trade protection against cost and upside, and there is no setting that is best on every count.

The put strike: how much loss you accept

A put close to the current price, say 5% below, protects more: the floor sits near what you paid. It also costs more, because it is more likely to pay off.
A put further out of the money, say 10–15% below, is cheaper but leaves a bigger loss before it starts to work.
A practical way to choose: decide the largest loss you could live with on this position, then pick the put strike that stops it there once the net premium is counted.

The call strike: how much upside you keep

A call close to the price brings in more premium, which can pay for a stronger put. It also caps your gain sooner and is more likely to be assigned.
A call further out leaves more room to run but pays less, so the collar costs more.

Why the trade-off exists

For a given stock and expiration you can tighten the floor, raise the cap or lower the cost, but improving one usually worsens another. Prices depend on implied volatility: when the market expects big moves, the put you buy is expensive, but so is the call you sell. Many stocks also show volatility skew, meaning out-of-the-money puts are priced at a higher implied volatility than equally distant calls. That is one reason a zero-cost collar usually needs a call closer to the price than its put.

Choosing the expiration

Both options normally share one expiration date. The choice is how long you want protection and how often you want to make a decision.

Shorter, one to two months. Each option costs less and you can adjust often, but you re-decide often too, paying a bid-ask spread and commissions each time.
Longer, three months to a year or more. Fewer decisions, and an option’s time value grows more slowly than its time to expiration, so longer protection usually costs less per month. The catch: your cap is fixed for longer, on strikes chosen today.
Check the calendar. An earnings report or an ex-dividend date before expiration changes both the risk and the chance of early assignment.
Check liquidity. Prefer expirations and strikes with tight bid-ask spreads and real trading volume. On thinly traded options the spread alone can be a large cost.

What a collar costs: zero-cost, debit and credit collars

The net premium is the call premium you receive minus the put premium you pay. Its sign names the collar.

Net debit collar: The put costs more than the call brings in, so you pay the difference. Common when you want a close floor or plenty of room above.
Zero-cost collar: The two premiums roughly match, so you pay nothing net apart from commissions. This is the classic version, and the one Mark Cuban used in 1999.
Net credit collar: The call brings in more than the put costs, so you are paid to open the trade, usually because the call is close to the price and the cap is tight.

Zero cost does not mean free. The real price of a collar is the upside you agree to give up above the call strike, plus the spreads and commissions on two option trades. See net debit and net credit.

The payoff diagram: floor, cap and breakeven

A payoff diagram plots your profit or loss at expiration against the stock price at expiration. A collar’s line has three parts: flat on the left (the floor), rising one for one in the middle, and flat on the right (the cap). Three formulas describe it. They are per share, so multiply by 100 for each contract, and net premium is the call premium minus the put premium, negative for a debit.

Max loss= put strike − purchase price + net premium

Max gain= call strike − purchase price + net premium

Breakeven= purchase price − net premium

Move the stock price and the strikes below. The shaded bands show where the put protects you and where the call caps you; the green and red areas are the gain and loss on the whole position.

P&L at $42: −$510
Floor (max loss): −$510
Cap (max gain): +$740
Breakeven: $50.10

The collarThe stock aloneLossGain

Stock price at expiration$42Bought at $50

Put strike (you buy)$45Costs $1.20 a share, $120 a contract

Call strike (you sell)$57.50Pays $1.10 a share, $110 a contract

At $42 the stock has fallen below your $45 put strike. The put lets you sell at $45, so the loss stops at −$510 however far the stock falls. The stock alone would be −$800.

These strikes make a net debit of $10 ($0.10 a share).

Illustrative, not a quote: 100 shares bought at $50. Premiums are estimated with the Black-Scholes model at 60 days to expiration, 41.5% implied volatility and a 4% interest rate, no dividend, rounded to 5 cents. Real option prices differ, and commissions are ignored.

A worked example

Every number here is illustrative and the assumptions are listed in full.

The stock: Buy 100 shares at $50.00; $5,000 invested
The put: Buy one 60-day $45 put at $1.20; $120 paid
The call: Sell one 60-day $57.50 call at $1.10; $110 received
Net premium: $1.10 − $1.20 = −$0.10 a share; $10 net debit
Not included: Commissions, fees, dividends and taxes

Apply the three formulas:

Max loss = 45 − 50 + (−0.10) = −$5.10 × 100 = −$510

Max gain = 57.50 − 50 + (−0.10) = +$7.40 × 100 = +$740

Breakeven = 50 − (−0.10) = $50.10

For a $10 net debit, the worst case on a $5,000 position is a loss of $510 (10.2%), while the stock can rise up to $57.50 and earn up to $740 (14.8%) before the cap applies. Here is the position at several prices on expiration day, next to owning the shares with no options.

Profit or loss at expiration for 100 shares, with and without the collar
Price at expiration	Stock alone	Collar	What happens
$35	−$1,500	−$510	Put in the money: sell the shares at $45 or sell the put
$40	−$1,000	−$510	Put in the money: the floor holds
$45	−$500	−$510	Both options expire worthless
$48	−$200	−$210	Both expire; you keep the shares
$50.10	+$10	$0	Breakeven
$55	+$500	+$490	Both expire; you keep the shares
$57.50	+$750	+$740	Both expire; the most you can make
$65	+$1,500	+$740	Call assigned: shares sold at $57.50

What happens at expiration

Where the stock closes on expiration day decides which option, if either, comes into play.

Above the call strike: your shares are sold

The call is in the money and will almost certainly be exercised, so you will be assigned: your shares are sold at the call strike and the put expires worthless. You keep the maximum gain. If you would rather keep the shares, buy back the call or roll it before expiration, which usually costs money because the call has gained value.

Below the put strike: the floor does its job

The put is in the money and the call expires worthless. You can exercise the put and sell your shares at the strike; sell the put for its value, roughly the strike minus the stock price, and keep the shares; or roll to a new put. Options that finish in the money by $0.01 or more are normally exercised automatically, so if you do not want to sell your shares, tell your broker or act before the close on expiration day.

Between the strikes: both options expire

Neither option is worth exercising, so both expire worthless. You keep the shares and the call premium; the put premium is spent. From that moment you are unhedged, so decide whether to open a new collar.

Managing and rolling a collar

You do not have to hold a collar to expiration. You can close it at any time at market prices: buy back the call, sell the put and keep or sell the shares. Or you can roll one or both options.

Rolling up. The stock has climbed toward the call strike and you still like it. Buy back the call and sell a higher one, often at a later date. That raises your cap, usually at a cost; many investors raise the put strike at the same time to lock in part of the gain.
Rolling down. The stock has fallen near or below the put. Sell the put for its value and buy a lower one, taking cash out of the protection while staying invested.
Rolling out. Expiration is near and you want protection to continue. Replace both options with similar strikes at a later date.

Every roll is a new trade with its own premiums, spreads and commissions. Judge it as a fresh collar priced from today, not as a repair to the old one.

Early assignment and dividends

US stock options are American-style: the owner can exercise on any business day before expiration, not only on the last day. In practice a call is rarely exercised early while it still holds meaningful time value, because the owner would get more by selling it.

The main exception is a dividend. Just before a stock goes ex-dividend, a call owner may exercise to collect the dividend if the call’s remaining time value is smaller than the payment. If your call is in the money ahead of an ex-dividend date, expect possible early assignment: your shares are sold at the strike the day before, and you do not receive that dividend.

After an early assignment you still hold the put, now without shares. It keeps whatever value it has, so sell it rather than leave a stand-alone put you did not intend to own. Dividends you do receive while collared are yours, and expected dividends are already reflected in option prices: they make calls cheaper and puts more expensive.

A note on taxes: talk to a tax professional

Collars can have tax consequences that a plain stock position does not. Two ideas come up often. A collar with very little room between its strikes can, in some cases, be treated as a constructive sale of an appreciated position, as if you had sold the stock. And the rules for qualified covered calls can affect your holding period and how losses are treated. Premiums, exercise and assignment each have their own treatment too. This guide is not tax advice. Before collaring a stock with a large gain, or in any taxable account, talk to a tax professional.

When a collar fits, and when it does not

A collar can fit when

You own, or want to own, a stock and stay invested, but a large drop would really hurt.
You would trade a capped upside for a known floor over a set period.
You want protection without paying much up front.
The position is too concentrated to ride out a crash, and selling now is not practical.
The stock has liquid options with tight spreads.

It usually does not fit when

You expect a large move up and do not want a ceiling on it.
You hold fewer than 100 shares.
The options trade thinly, so spreads eat the protection.
You would be unhappy to have the shares called away, for example because of a large untaxed gain.
You want a short, cheap hedge against a fall: a put alone may be simpler.

1999: the collar that protected a $1.4 billion fortune

“The whole market cratered and I was protected.”
Mark Cuban, as widely quoted

In April 1999 Yahoo agreed to buy broadcast.com for about $5.7 billion in stock. Mark Cuban’s share was roughly 14.6 million Yahoo shares, worth about $1.4 billion, which he could not sell right away.

He bought puts to set a minimum sale price and sold calls above the market to pay for them, for a net cost close to zero. When the dot-com bubble burst and Yahoo fell more than 90% from its peak, the puts held his floor. He gave up the gains above the call strike and kept his fortune. It is still cited as the textbook zero-cost collar.

Figures as widely reported, including by Moneywise and Wikipedia. Exact strike prices vary between accounts and are not given here.

Risks and limitations

Capped upside. If the stock soars, you keep only the move up to the call strike. This is the most common regret with collars.
Losses down to the floor are real. The put usually sits below your price, so you still take the first slice of a decline, plus any net debit.
The formulas hold at expiration. Before then the position is worth what the options trade for, which can differ from the payoff line.
Early assignment can end the trade before you planned, especially around dividends.
Costs add up. Bid-ask spreads, commissions and frequent rolls can take a meaningful share of the protection’s value.
Protection expires. After expiration you are unhedged unless you open a new collar.
Execution. Entering three legs separately exposes you to prices moving between fills; many brokers accept a collar as a single order.
Suitability. Options require broker approval and are not suitable for every investor. Read the Characteristics and Risks of Standardized Options before you trade.

Collar vs. protective put vs. covered call

A collar is a protective put and a covered call held together. Each half on its own is a common strategy, with a different balance of cost, protection and upside. The worked-example rows use the same strikes and premiums as above.

Collar compared with a protective put alone and a covered call alone
	Collar	Protective put alone	Covered call alone
What you hold	Shares, a bought put and a sold call	Shares and a bought put	Shares and a sold call
Upfront cost	Small net debit, zero, or a small credit	The full put premium	None: you receive the call premium
Downside	Limited at the put strike	Limited at the put strike, less the larger premium	Not limited: only cushioned by the premium
Upside	Capped at the call strike	Unlimited, less the put premium	Capped at the call strike
Worked example: worst case	−$510	−$620	−$4,890 if the stock goes to zero
Worked example: best case	+$740	Unlimited, less $120	+$860
Fits when	You want a floor and can live with a cap	You want a floor, full upside, and will pay for it	You want income and accept no protection

How Stillwater prices a collar every morning

Doing this by hand means pulling an option chain, pricing several strike combinations and checking each one against the earnings calendar. Stillwater does that work before the market opens. Every trading morning it shortlists a few stocks and, for each one, prices a collar from the live option chain: the put to buy, the call to sell, the net cost, the floor and the cap. You decide whether to trade, in your own brokerage account. See what a Stillwater trading morning looks like.

The approach comes from real trading. Across 225 closed collars in the Stillwater track record, the average losing collar returned −5.8% and the average winner +13%: the puts kept most losses small. Those are one trader’s results, not a promise, and the method section explains exactly how they are measured.

Stillwater is a single plan at $69 a month; see what the plan includes.

Start your free trialResearch and education, not investment advice.

Glossary

Assignment: What happens to the seller when an option they sold is exercised. If your covered call is assigned, your shares are sold at the call strike. US stock options can be exercised on any business day before expiration, so assignment can come early.
Breakeven: The stock price at expiration where the whole position neither makes nor loses money: your purchase price plus any net debit, or minus any net credit, ignoring commissions.
Call option: The right, but not the obligation, to buy 100 shares at the strike price until the option expires. When you sell a call against shares you own, you take the other side: you may have to sell your shares at the strike.
Contract: One listed option. A standard US stock option contract covers 100 shares, which is why collars are built in 100-share lots.
Exercise: Using an option: buying the shares at the strike with a call, or selling them at the strike with a put. At expiration, options that finish in the money by $0.01 or more are normally exercised automatically unless the owner tells their broker otherwise.
Expiration: The last day an option exists. Standard monthly US stock options expire on the third Friday of the month, and many stocks also list weekly expirations. After expiration the option either has been exercised or is gone.
Implied volatility: How much the market expects a stock to move, worked backwards from option prices and stated as an annual percentage. Higher implied volatility makes every option on the stock more expensive: the put you buy and the call you sell.
In the money: An option that would be worth something if it expired right now: a put with a strike above the stock price, or a call with a strike below it. That built-in amount is its intrinsic value.
Net debit and net credit: The call premium you receive minus the put premium you pay. If the put costs more you pay a net debit; if the call brings in more you receive a net credit; if they match it is a zero-cost collar.
Out of the money: An option that would be worthless if it expired right now: a put with a strike below the stock price, or a call with a strike above it. Collars normally use an out-of-the-money put and an out-of-the-money call.
Premium: The price of an option. It is quoted per share, and one contract covers 100 shares, so a $1.20 quote costs $120 per contract before fees. Buyers pay it; sellers receive it and keep it whatever happens next.
Put option: The right, but not the obligation, to sell 100 shares at the strike price until the option expires. Owning a put on shares you hold sets a minimum sale price for them.
Rolling: Closing an option you hold or sold and opening a similar one with a different strike, a later expiration, or both, usually as a single order.
Strike price: The fixed price at which an option lets its owner buy (a call) or sell (a put) the shares. In a collar, the put strike is your floor and the call strike is your cap.

Common questions about collars

Is a collar the same as a zero-cost collar?

Not always. A collar is any position that pairs shares you own with a put you buy and a call you sell. It is called zero-cost when the call premium fully pays for the put. Many collars carry a small net debit or net credit instead.

How many shares do I need to collar a stock?

At least 100, because one standard US stock option contract covers 100 shares. To collar 300 shares you would buy three puts and sell three calls.

Can I still lose money with a collar?

Yes. The put usually sits below the price you paid, so you can lose the distance down to the put strike, plus any net debit and commissions. A collar limits the loss; it does not remove it.

What happens if my shares are called away?

You sell them at the call strike and keep both premiums, which is the collar’s maximum gain. If you still want to own the stock you can buy it back, but at the higher market price, and the sale may be a taxable event.

Do I need approval from my broker to trade a collar?

Yes. Brokers require options approval before you can trade options. Buying puts and selling covered calls are usually allowed at the lower approval levels, but each broker sets its own rules.

How is a collar different from a stop-loss order?

A stop-loss order becomes a market order once the stock trades at your stop price, so in a fast drop or an overnight gap it can fill well below that price. A put gives you the right to sell at the strike until expiration, whatever the stock does. The trade-off is that a put costs a premium and, in a collar, you give up the upside above the call.

When should I close or roll a collar?

Common triggers are the stock approaching the call strike while you still want to own it, the stock falling below the put strike, an earnings or ex-dividend date before expiration, and expiration itself getting close. Each roll is a new trade with its own costs.

Sources and further reading

Collar (protective collar), Options Industry Council
Options assignment FAQ, Options Industry Council
Characteristics and Risks of Standardized Options, The Options Clearing Corporation
Options, Investor.gov, U.S. Securities and Exchange Commission
Collar: definition and example, Investopedia

This guide explains how collars work. It is education, not a recommendation to buy or sell any security, and not tax or legal advice. Read Stillwater’s disclosures.