Collar

Protective put financed by a covered call — cap downside and upside at once, often for near-zero cost.

A collar combines a protective put with a covered call on the same shares. The call premium pays for the put, so you get downside protection cheaply by giving up some upside.

Market outlook

You own the stock, want to protect gains, and are willing to cap upside to do it for little or no cost.

Construction

• Own 100 shares at cost $S_0$.
• Buy 1 put at strike $K_p < S_0$ (the floor).
• Sell 1 call at strike $K_c > S_0$ (the ceiling).

Net debit/credit $= P_{put} - P_{call}$. A zero-cost collar picks strikes so this is near $0.

Risk / reward

• Max loss: capped — the stock can't hurt you below $K_p$.
• Max profit: capped — gains stop at $K_c$.
• Your outcome is boxed into the range $[K_p,\; K_c]$ for the life of the options.

When to use it

• Concentrated single-stock positions you can't or won't sell.
• Riding out volatility while protecting a big unrealized gain.

Risks & management

• Capped upside: a sharp rally above $K_c$ gets your shares called away.
• Width between strikes sets the trade-off between protection cost and upside room.