Option collar

Also called: Collar, Protective collar

A collar is three positions at once: long stock, a long put below the current price, and a short call above it. The put sets a floor under losses; the call sets a ceiling on gains and pays for the put.

How does a collar work?

The protective put gives you the right to sell at the put strike, capping downside. To pay for that protection, you sell a call and collect premium, which caps upside at the call strike. When the call premium roughly equals the put cost, the structure is a "costless" or "zero-cost" collar — protection funded by giving up some upside rather than by writing a check.

Why use a collar on a concentrated position?

A collar lets a holder of appreciated single stock define a worst case while staying invested and deferring the sale. Spaced and structured properly, a collar can avoid triggering the constructive sale rules of IRC §1259 that would otherwise force immediate gain recognition.

This definition 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. Consult a qualified tax professional and investment advisor before acting. Yayati Asset Management is a Registered Investment Adviser.