The Collar Strategy - Long Stock, Long Put, Short Call

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

A collar is a stock position with a floor and a ceiling: you own at least 100 shares, buy a put below the stock price and sell a call above it, usually with the same expiration. The put limits how much you can lose, the call limits how much you can make, and the call's premium pays for some or all of the put.

In other words, a collar is a protective put with a covered call added to it. What Is a Covered Call? Income, Capped Upside and the Full Downside covers the call side on its own. Here the two pieces work together, and the trade-off is simple to state: you give up gains above the call strike to make the downside protection cheaper.

For the collar in this lesson (100 XYZ at $52, the 50 put bought for $1.52 and the 56 call sold for $1.19, 45 days to expiration), at expiration and before fees:

• Maximum loss is $233: ($52 - $50 + $0.33 net debit) x 100, at any price at or below $50.
• Maximum profit is $367: ($56 - $52 - $0.33) x 100, at any price at or above $56.
• Break-even is $52.33: the $52 stock price plus the $0.33 net debit.

How does a collar work?

Each piece does one job:

1. Long 100 shares at $52: the position you want to protect.
2. Long one 50 put for $1.52: the floor. Below $50, the put gains a dollar for every dollar the shares lose.
3. Short one 56 call for $1.19: the ceiling. Above $56, the call loses a dollar for every dollar the shares gain, and if it is assigned your shares are sold at $56.

The premiums are model prices from the same engine as the free OptionsPro profit calculator, for XYZ at $52 with 35% implied volatility and 45 days to expiration. You pay $1.52 and receive $1.19, so the collar costs a net debit of $0.33 per share, or $33. The same floor bought as a protective put alone would cost $152.

The call is covered by the shares you own, so a collar does not carry the unlimited risk of a naked short call. The Options Industry Council's collar strategy page describes it as being "for holders or buyers of a stock who are concerned about a correction and wish to hedge the long stock position."

What are a collar's maximum loss, maximum profit and break-even?

• Maximum loss = (stock price paid - put strike + net debit) x 100. For a net credit, subtract the credit instead.
• Maximum profit = (call strike - stock price paid - net debit) x 100. For a net credit, add it.
• Break-even = stock price paid + net debit (or minus a net credit).

Compared with the shares alone, the collar turns an $800 loss at $44 into a $233 loss, and an $800 gain at $60 into a $367 gain. Whether that is a good trade depends entirely on which of those outcomes worries you more.

What happens to a collar at expiration?

• XYZ below $50: the put is in the money. You can sell it and keep the shares, or exercise it and sell the shares at $50. The call expires worthless.
• XYZ between $50 and $56: both options expire worthless. You keep the shares, now unhedged.
• XYZ above $56: the call is in the money and will generally be assigned, so your shares are sold at $56. If you want to keep them, you would have to buy the call back first, at a loss on the call.

That last case surprises many first-time collar traders. A collar on shares you never want to sell is a collar you may end up unwinding at a loss on the call, so decide before you open it whether being called away at the ceiling is acceptable.

Can a collar be assigned early?

Yes. Most U.S. stock options are American style, so the short call can be assigned on any business day before expiration. The OIC's collar strategy page notes that early assignment of the short call "generally occurs only just before the stock goes ex-dividend," when a call holder exercises to collect the dividend. If XYZ pays a dividend and the 56 call is in the money just before the ex-dividend date, plan for the possibility that your shares are called away early, and you lose the dividend. A call that is deep in the money with little time value left can also be assigned early on other days.

Many brokers let you open the put and the call together as one multi-leg order, but order handling and the approval level needed for a collar vary, so check with your broker before you place one.

Does a collar affect taxes?

It can: because the put offsets the shares, a collar may be treated as an offsetting position (a straddle) under the rules in IRS Publication 550, which can defer losses and affect holding periods, so talk to a tax professional before collaring a position with a large gain. The Tax Treatment of Options module in Course 4 covers option taxes in more detail.