What it is
You own 100 shares, buy a put below the current price and sell a call above it. The put sets a floor under the shares; the call's premium pays for some or all of the put. In exchange, the call caps how much the shares can earn while the collar is on.
The example here opens for a small credit because it prices both options at one volatility. On real quotes, puts usually cost more than calls the same distance away, a pattern called skew, so a collar like this one more often costs a little to put on, or needs the call strike moved closer to pay for the put.
What has to happen for it to make money
The shares have to finish above the break-even, which is roughly what they cost, adjusted by the net premium. Past the call strike the gain stops; under the put strike, so does the loss. Between the two, the position moves with the shares.
That box is the point. A collar is not a bet on a direction so much as a decision to accept a known range of outcomes for a while: someone who wants to keep a stock through an uncertain stretch, or who has a large gain they do not want to give back, without selling.
Once it is on
If the stock rallies to the call strike, the choice is the same one a covered call faces: let the shares go there, or buy the call back and set a new collar higher. If it falls below the put's strike, the put can be sold for its value, or exercised to sell the shares at the floor. Collars are often rebuilt each month or each quarter, which turns them into an ongoing cost of insurance rather than a single trade.
Selling the shares through either option can realise a taxable gain. That depends on your own holding period and cost basis, and nothing here works it out.
What goes wrong
A strong rally. The call gives away everything above its strike, and over long periods those rallies are much of what owning shares pays. Collars held continuously trade a good deal of long-run return for a narrower range.
A slow decline above the floor. The put only pays below its strike, so a drift down that stops short of it is a loss the collar does nothing about.
Pros and cons
- Pro: a known floor under shares you want to keep.
- Pro: the call can pay for most of the protection.
- Pro: no need to sell the shares to reduce the risk.
- Con: the upside is capped while it is on.
- Con: losses down to the put's strike are still yours.
- Con: rebuilt repeatedly, it becomes a standing cost.
In Restrike
On the Portfolio the sold call nests beneath the shares like any covered call, and the bought put is a separate row, tracked in dollars. One strategy label across all of them lets the scorecards see the collar whole. Brokerage import is read-only, and Restrike never places a trade.