Zero-cost collar

A collar is a strategy that combines a stock position an investor already owns with two options, a protective put bought below the current price and a covered call sold above it, to limit both how much the position can lose and how much it can gain. It is often used by investors who want to hold onto a stock, perhaps for tax reasons or long-term conviction, but who want to cap the downside during a period of uncertainty.

The put option sets a floor under the position, since the investor can sell the stock at the put's strike price no matter how far the shares fall below it. The call option sold against the position caps the upside, since the shares can be called away if the stock rises above the call's strike price, and the premium collected from selling that call helps pay for the put. Investors often size the two strikes so the premium received from the call roughly offsets the premium paid for the put, which is why the strategy is sometimes described as having very little upfront cost.

The tradeoff is straightforward. In exchange for meaningful protection against a large decline, the investor gives up the ability to fully participate if the stock rallies hard, since gains beyond the call's strike price pass to whoever bought the call. Collars are commonly used around events that could move a stock sharply in either direction, or by employees and insiders holding a large, concentrated position who want protection without selling the underlying shares outright.