Definition
A collar is an options strategy applied to a stock the investor already owns. The investor sells a call option above the current price and uses the premium received to buy a put option below the current price, both with the same expiration.
The result brackets the stock between two strikes: the put sets a floor that limits losses, and the call sets a ceiling that caps gains. The structure resembles a band, or collar, around the position.
Why it matters
How it works
The collar combines a covered call with a protective put. Selling the call generates income; buying the put spends income. When the strikes are chosen so the two premiums roughly offset, the protection is nearly costless, a structure sometimes called a zero-cost collar. Below the put strike the investor cannot lose more, because the put gains value to offset the falling stock. Above the call strike the investor gains no more, because the shares are likely called away. Between the strikes the position behaves like ordinary stock ownership.