Strategy guide
Protective collars: fence in gains without paying full price for insurance
A protective collar combines ownership of 100 shares with a sold call above the price and a bought put below it, usually financed by the call's premium. Both maximum profit and maximum loss are fixed the moment the trade opens. It fences in an existing gain, trading away further upside for defined downside protection.
By Option Ideas Editorial Team · Published September 1, 2026 · Updated September 2, 2026
The mechanics
You need 100 shares. You sell one call above the current price (collecting premium) and buy one put below the current price (paying premium) — usually sized so the call mostly or fully pays for the put. By expiration, the stock lands in one of three zones:
Above the call strike
Shares called away at the call strike — your gain is capped there, same trade-off as a covered call.
Between the two strikes
Both options expire worthless. You keep the shares, and simply own the stock (minus or plus whatever net premium the collar cost or paid you).
Below the put strike
The put protects you — your loss stops at the put strike, no matter how much further the stock falls.
The numbers, precisely
- Max profit (capped)
- (Call strike − cost basis) × 100, plus or minus the net premium. Fixed the moment you open the collar.
- Max loss (capped)
- (Put strike − cost basis) × 100, plus or minus the net premium. Also fixed the moment you open the collar — this is the whole point of the put leg.
- Breakeven
- Cost basis, adjusted by the net premium (a net credit lowers it; a net debit raises it).
- Market view
- Neutral — you're not trying to squeeze more upside out of the stock, you're defending what it's already made you.
A worked example
Illustrative numbers, not live quotes — for that, see the ideas page, which prices collars from a real, current option chain.
| You own | 100 shares, cost basis $80, now at $100 |
| You sell | 1x $110 call for $3.00 |
| You buy | 1x $90 put for $2.50 — net $0.50 credit |
| If stock closes at $130 | Called away at $110. Profit capped at $3,050 — the $2,000 stock gain to $110 was mostly locked in well before this close. |
| If stock closes at $50 | Put protects you at $90. Loss capped at $950, versus $3,000 for the shares alone. |
When it fits, and when it doesn't
Fits
A stock you hold has already run up, you want to lock in most of the gain without selling outright, and you don't mind giving up further upside to get downside protection cheaply.
Doesn't fit
You still expect meaningful further upside — the call strike caps that exactly like a plain covered call would, and a full-price put alone would protect you without capping the top.
Risks and assumptions
- The call strike caps upside just like a plain covered call -- a strong rally past it still leaves the same gain on the table.
- Between the two strikes, a collar behaves like plain stock ownership plus a small net premium adjustment -- it doesn't add income the way a standalone covered call does over multiple cycles.
- Assignment on the short call can happen before expiration, especially near a dividend date, unwinding the structure sooner than planned.
FAQ
Is a collar the same as a covered call plus a protective put?
Yes -- that's exactly what it is, opened as one combined position rather than two separate trades, usually sized so the call's premium offsets most or all of the put's cost.
Why not just buy the put alone, without selling the call?
A standalone protective put costs full price and doesn't cap the upside. A collar is cheaper (sometimes a net credit) specifically because you're giving up gains above the call strike to help pay for it.
Does the collar protect the original cost basis or today's price?
Whichever the put strike is set relative to -- the strikes are chosen independently of cost basis, so the actual floor is the put strike, adjusted by the net premium, not automatically today's price or the original purchase price.
Primary references
Not hyperlinked deliberately -- verify current material directly on each organization's own site.
- The Options Clearing Corporation (OCC)
- Cboe Options Institute