What Is an Option Collar? Floors, Ceilings, and How It Works
Key takeaways
- A collar = covered call (sells upside above a ceiling) + protective put (sets a floor below).
- It defines a price range, bounding both downside and extreme upside.
- Premium from the call can offset most or all of the put’s cost.
- It is the core hedge for selling concentrated stock down gradually without a forced sale in a drawdown.
An option collar is a two-part structure that brackets a stock position between a defined floor and ceiling. It is the workhorse hedge behind tax-smart exits from concentrated positions, because it lets an investor hold through volatility while selling down on a schedule.
What are the two parts of a collar?
- Covered call: selling a call against held shares collects premium and sets a ceiling — above the strike, gains are capped and shares may be called away at a pre-set price.
- Protective put: buying a put sets a floor — if the stock falls sharply, the put gains value, offsetting the paper loss in the shares.
Combined, the call premium helps pay for the put, so the floor can be established cheaply — sometimes at zero net cost. The trade-off is giving up extreme upside above the ceiling in exchange for downside protection at the floor.
How does a collar look in practice?
Example: 12-month asymmetrical collar
An investor holds 100,000 shares at $100. They sell monthly covered calls at a $105 strike, collecting roughly $1.50/share per month, and use part of that premium to buy 3-month puts at $95. The result: a $95 floor and a $105 ceiling, with monthly income building a tax-offset pool throughout the exit timeline.
Why use a collar to exit concentrated stock?
The point of a collar in an exit strategy is not to bet on direction — it is to make the timeline predictable. With a floor in place, the investor is never forced to sell at the bottom; with a ceiling, some shares are called away at a known price as the position winds down. Collar strategies take longer than covered-calls-only approaches, because some premium is spent on puts rather than on funding the tax — the cost of buying certainty.
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This article is for educational and informational purposes only and is not investment, tax, or legal advice. Option strategies involve risk and are not suitable for all investors. Tax treatment of options is complex and depends on individual circumstances, holding periods, and applicable law; tax rates referenced reflect 2024–2025 federal and state estimates and are subject to change. Consult a qualified tax professional and investment advisor before acting. Yayati Asset Management is a Registered Investment Adviser. © Yayati Asset Management. VOLT™ is a trademark of Yayati.
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