How Skew Prices Collars and Risk Reversals

Reviewed by Leon Moyer - Published October 9, 2026 - Last reviewed October 9, 2026

A collar buys a put and sells a call against shares you own; a risk reversal sells a put and buys a call without the shares. Both trade one option against the other, so volatility skew largely decides whether they cost money or bring it in.

Volatility Skew showed that on most stocks a put $5 below the price carries higher implied volatility than a call $5 above it. That is a small detail for a single option. For a strategy built from exactly that pair, it is the whole price.

How does skew affect a collar?

The OIC's skew overview notes that in a smirk a collar buyer would likely be purchasing the higher-IV option, which is the put (OIC: Volatility Skew and Options).

Here is the skewed collar at expiration, with the shares alone for comparison:

• Maximum loss: $513, if XYZ finishes at or below $45: the $5 drop to the put strike plus the $0.13 net debit, times 100.
• Maximum profit: $487, if XYZ finishes at or above $55: the $5 rise to the call strike minus the $0.13 debit, times 100. The shares are called away at $55.
• Break-even: $50.13, the purchase price plus the net debit.

A collar is a defined-risk position on shares you own. Its costs are the capped upside and, when skew is steep, a small debit. To reach a true zero-cost collar on a skewed stock, traders usually move the call closer to the stock or the put further away, accepting less upside or less protection.

What is a risk reversal?

A bullish risk reversal is the collar's mirror image without the shares: sell an out-of-the-money put and buy an out-of-the-money call in the same expiration. The OIC describes it as a way to use a smirk by "purchasing the lower volatility call and selling the higher volatility put."

• Maximum loss: $4,487, if XYZ falls to zero: the $45 strike times 100, minus the $13 credit.
• Maximum profit: unlimited, because the long call gains $100 for every $1 XYZ rises above $55.
• Break-even: $44.87, the put strike minus the net credit. Between $45 and $55 the result is the $13 credit.

Below $45 a risk reversal behaves like owning the shares from $44.87; above $55 it behaves like owning them from $54.87. It is a leveraged, stock-like bet with a gap in the middle, not a hedge.

What do brokers require for a risk reversal?

The short put is the issue. Brokers treat it either as cash-secured (cash for the full strike value set aside) or as an uncovered put in a margin account, which typically needs a higher options approval level. FINRA Rule 2360 requires firms to approve each customer's options account and to keep specific written procedures, including suitability criteria and approval, for uncovered short option writing. The approval tiers and margin amounts are each broker's own and differ between firms, so check yours before placing the trade.

A collar on shares you own usually needs a lower approval level, because the shares cover the short call. Again, confirm with your broker. The collar's short call can still be assigned early, most often just before an ex-dividend date, as the Early Assignment and Dividends lesson explains.

When does skew help and when does it hurt?

• Hurts the hedger. Protecting shares means buying the expensive side. Steep skew makes collars and protective puts dearer.
• Pays the risk taker. Selling the downside, as in a risk reversal, collects the skew, as payment for taking the crash risk that created it.
• Changes with the market. Skew often steepens in selloffs, exactly when hedgers want protection most. A collar priced at zero cost in a calm market can cost a debit after a drop.