What is a collar strategy?

A collar strategy is used to protect against significant losses while also limiting potential gains. It is suitable when you expect the price of the underlying security to move up or down over the long term but are uncertain about its short-term movements.

Long Collar

A long collar strategy involves buying (or owning) stocks while simultaneously buying a protective put and selling a call option against those stocks. Both the put and call options are out-of-the-money, have the same expiration date, and must be equal in number of contracts. If the stock price declines, the purchased put provides protection below its strike price until expiration. If the stock price rises, profit potential is capped at the strike price of the covered call.

Short Collar

A short collar strategy involves short selling stocks while simultaneously buying a protective call and selling a put option against those stocks. Both the call and put options are out-of-the-money, have the same expiration date, and must be equal in number of contracts. If the stock price rises, the purchased call provides protection above its strike price until expiration. If the stock price declines, profit potential is capped at the strike price of the covered put.

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Option trading entails significant risk and is not appropriate for all investors. Option investors can rapidly lose the entire value of their investment in a short period of time and incur permanent loss by expiration date. You need to complete an options trading application and get approval on eligible accounts. Please read the Characteristics and Risks of Standardized Options and Option Spread Risk Disclosure before trading options.