Put Spreads and Collars - Selling Options to Pay for a Portfolio Hedge
Reviewed by Leon Moyer - Published October 9, 2026 - Last reviewed October 9, 2026
In this lesson
Compare a put, a put spread, a collar and a put spread collar as portfolio hedges, and state each one's cost, maximum loss, maximum gain and break-even at expiration.
A put spread collar is a hedge that buys a put, sells a lower-strike put and sells a higher-strike call against a portfolio, so the two options you sell pay for most of the protection you buy. It is one of three common ways to pay for part of a put hedge by selling something against it: the put spread, the collar, and the two combined.
Each one gives something up: a put spread, protection in the deepest part of a crash; a collar, gains above a ceiling; a put spread collar, some of both. This lesson uses the same hypothetical portfolio throughout so the trade-offs are easy to compare: $100,000 of stocks that move exactly like XYZ, a hypothetical index fund at $100, hedged with 10 contracts of 90-day XYZ options.
Every premium here is the calculator model's value at one setup: XYZ at $100, 90 days, 26% implied volatility and a 4.5% rate. That gives the 95 put $2.54, the 90 put $1.22, the 85 put $0.49 and the 115 call $1.15. Real quotes differ, mostly because of skew, which the Course 3 lesson How Skew Prices Collars and Risk Reversals covers.
How does a put spread hedge work?
A put spread buys one put and sells another with the same expiration and a lower strike. The premium from the sold put lowers the cost of the bought one. In return, the spread can pay at most the difference between the strikes. The Options Industry Council's guide to the bear put spread describes the same two legs as a stand-alone trade.
Worked example
Hedging with a 95/85 put spread
You buy 10 XYZ 95 puts at $2.54 and sell 10 XYZ 85 puts at $0.49, for a net cost of $2.05 x 100 x 10 = $2,050. That is $490 less than the 95 puts alone would cost.
- Between $95 and $85, every dollar XYZ falls adds $1,000 to the long puts, so the loss holds at $5,000 plus the $2,050 premium: $7,050.
- Below $85, the short puts gain as fast as the long puts, so the spread stops growing at its $10,000 maximum. At $70 the portfolio loses $30,000, the spread pays $10,000, and the total loss is $22,050.
- If XYZ rises to $115, the puts expire worthless and the portfolio gains $15,000 - $2,050 = $12,950.
At expiration, the hedged portfolio has no fixed maximum profit, because it keeps its upside less the $2,050 net premium. Its maximum loss is $92,050, reached only if XYZ falls to zero, because the protection stops at $85. It breaks even at $102.05, the $100 starting price plus the $2.05 net premium per share.
Illustrative and hypothetical. The ticker and prices are invented for teaching, and the figures exclude commissions, fees, margin interest and taxes, which reduce real results. Past or hypothetical outcomes do not indicate future results.
The same portfolio hedged with a 95/85 put spread, at expiration
Hover or tap the chart, or focus it and use the arrow keys, to read any price.
Open this trade in the free calculatorShow as table
A put spread does not cover the far tail. It caps the loss in a moderate fall, but below the lower strike every further dollar of loss returns. As a crash hedge it is weaker than a plain put, even though here it starts protecting closer to today's price, at $95 rather than $90.
What is a collar on a portfolio?
A collar buys a put and sells a call above the current price, both with the same expiration. The call's premium pays for some or all of the put. When the two premiums are about equal, it is called a zero-cost collar. The Options Industry Council's collar strategy guide describes it on a single stock; the Course 2 lessons The Collar Strategy - Long Stock, Long Put, Short Call and Zero-Cost Collars - What a "Free" Hedge Really Costs cover that version, and here it is applied to a whole portfolio.
At these prices, the 115 call's premium comes closest to the 90 put's. Buying 10 XYZ 90 puts at $1.22 and selling 10 XYZ 115 calls at $1.15 costs a net $0.07 a share, or $70, close to zero. At expiration the collared portfolio's maximum profit is $14,930, the $15,000 gain to $115 less the $70, reached at $115 or higher. Its maximum loss is $10,070, reached at $90 or lower. It breaks even at $100.07.
A short call on an index or fund you do not own carries large risk. If your portfolio holds the fund's shares, the call is covered: a rally above $115 is paid for by the shares. If it holds other stocks, the call is uncovered as far as your broker is concerned. In a sharp rally where your stocks lag the index, the call's loss can exceed your portfolio's gain, and an uncovered short call's loss is unlimited in theory. Uncovered calls also need a higher options approval level and margin, and brokers differ in what they allow, so check with yours.
What is a put spread collar?
A put spread collar sells the call and the lower put. With the 95/85 put spread and the 115 call, the net cost is $2.54 - $0.49 - $1.15 = $0.90 a share, or $900.
At expiration its maximum profit is $14,100, the $15,000 gain to $115 less the $900 premium. Its maximum loss is $90,900 if XYZ falls to zero, because there is no protection below $85; between $95 and $85 the loss holds at $5,900. It breaks even at $100.90.
Four ways to hedge the same portfolio, at expiration
Put (buy the 90 put)
Costs $1,220
Worst loss $11,220; upside open
Put spread (95/85)
Costs $2,050
Covers $95 to $85 only
Collar (90 put, 115 call)
Costs $70
Loss capped $10,070; gain capped $14,930
Put spread collar (95/85, 115 call)
Costs $900
Gain capped $14,100; open below $85
Gray line: zero, where the position breaks even. Dashed line: strike. Each sketch shows profit or loss at expiration as the stock price rises from left to right.
Which of these hedges fits which goal?
What each hedge costs up front, and what it loses in a 30% crash
Up-front cost
Loss if XYZ falls 30%
The pattern: whatever you sell to cheapen the put you buy comes back somewhere else.
- Plain 90 put ($1,220): the only one here that protects all the way down with the upside left open. The best fit when the goal is to survive a true crash.
- 95/85 put spread ($2,050): the most expensive here, because its protection starts $5 higher than the 90 put's. It stops paying below the lower strike, so it fits a feared correction rather than a collapse.
- 90/115 collar ($70): the cheapest up front, with a hard floor, but no gains above the call strike. A fit for trading upside for certainty, say ahead of a known spending date.
- Put spread collar ($900): cheaper than the plain put and the put spread, but dearer than the collar, with a band of protection that starts at $95 and a cap. Like the put spread, it leaves the far tail open.
One cost does not show in the bars: a sold call deep in the money may need to be bought back at a high price, and a short American-style option can be assigned early.
Check your understanding
A put spread hedge buys the 95 put and sells the 85 put. Why does the protection stop below $85?
Show answer
Below $85 the sold 85 puts gain value as fast as the bought 95 puts, so the spread stays at its maximum: the $10 difference between the strikes.
What is the break-even of the 90/115 collar, and why is it so close to the starting price?
Show answer
$100.07. The $1.15 call premium pays for all but $0.07 of the $1.22 put, so only $0.07 a share is left to recover.
Which of the four hedges in this lesson protects all the way down to zero with the upside left open?
Show answer
Only the plain 90 put. The put spread and put spread collar stop protecting below $85, and the collar caps gains at $115.
Key takeaways
- Selling a lower put, a call, or both pays for part of a portfolio hedge.
- A put spread caps protection at the width of its strikes, so it leaves the deepest part of a crash uncovered.
- A collar sets a floor and a ceiling; a zero-cost collar trades all gains above the call strike for the put.
- A put spread collar costs less than a plain put or a put spread but more than a near-zero-cost collar, with a band of protection, a cap on gains and an open far tail.
- A short call on an index or fund you do not own is uncovered and carries large risk in a sharp rally.
Common questions
What is a put spread collar?
A put spread collar is a hedge that buys a put, sells a lower-strike put and sells a higher-strike call, all with the same expiration. The two sold options pay for most of the bought put, in exchange for a cap on gains and no protection below the lower put's strike.
How much does a put spread collar cost?
It depends on the strikes and on market prices. In this lesson's model, buying a 95 put and selling an 85 put and a 115 call on a $100 fund nets about $0.90 a share, because the two sold options pay for most of the $2.54 put. Real quotes differ, so price it with your broker's numbers.
Is a put spread a good hedge?
A put spread costs less than buying its higher-strike put alone and protects well against a moderate fall. Its weakness is the deep crash: below the lower strike the protection stops growing, so it does not fully cover the far tail.
What is the downside of a collar?
A collar caps your gains at the call's strike, so a strong rally passes you by. If the call is written on an index or fund you do not own, it is an uncovered short call with large risk if the market rises sharply.