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2018issue C0942-43

A protective collar as an event-risk budget

A protective collar on an existing long is a purchased put and a sold call against the same shares, so call premium can offset some or all of the put premium. While both options remain on, the overlay limits downside and caps upside. Tenor follows the hedge-horizon, and strike width changes net debit, residual-loss-bound, and capped participation.

  • A protective collar on an existing long holding is formed by buying a put and selling a call against those same shares, so premium from the call can offset some or all of the put premium.
  • While both options remain on, the overlay places a defined limit on downside and also caps upside for the life of the two contracts.
  • Option tenor is meant to match the hedge-horizon, with shorter-dated contracts when the event is days away and longer-dated contracts when the concern is a multi-week consolidation.
  • A tight-collar keeps net cash outlay and residual-loss-bound small while capping upside tightly; a loose-collar preserves more upside and leaves a larger net debit and a higher residual-loss-bound.
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Current trackProtective collar20 readings

How the overlay is built

A protective collar on an existing long holding is formed by buying a put and selling a call against those same shares. Premium taken in from the sold call can offset some or all of the premium paid for the put, which is why the structure is offered as an alternative to buying a standalone put or selling the shares.

While both options remain on, the overlay places a defined limit on downside and also caps upside for the life of the two contracts.

Matching tenor to the hedge-horizon

Option tenor is meant to match the hedge-horizon. Shorter-dated contracts are used when the event is days away. Longer-dated contracts are used when the concern is a multi-week consolidation.

Strike width as the budget choice

A higher put strike removes more downside and costs more premium. A sold call closer to spot offsets more of that cost and leaves less upside, while a farther out-of-the-money call does the reverse.

A tight-collar uses a near-spot sold call that keeps net cash outlay and residual loss small while also capping upside tightly. A loose-collar uses a farther out-of-the-money sold call that preserves more upside and leaves a larger net debit and a higher residual-loss-bound. The residual-loss-bound is the worst-case net result of shares plus both options while the collar remains in place.

An illustrated 100-share case

In the illustrated 100-share case, the stock stood at 188.38 with an announcement 10 days out. A 187.50 put bought at 4.45 against a 190 call sold at 4.25, both with 15 days to expiration, created a 20 net debit, a stated worst-case of -108, and a stated maximum of 142 while the collar was held.

The same put paired with a 207.5 call sold at 0.39 produced a 406 net debit, a stated worst-case of -507, and a stated maximum of 1493 while the collar was held.

When the collar comes off

Once the options expire or the collar is removed, the book reverts to the unhedged long shares. No single strike set is universally correct, because other expirations and strikes produce different reward-to-risk tradeoffs that must be matched to the holder's objectives.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
18 of 19 in the Protective collar track
202046-47 pp.Next on Protective collarConstructing position-level collars around unsold holdingsA long holding the owner does not want to sell can be hedged position by position with a protective put, or with a protective collar that pairs that put with a sold call.
All readings on this track · 19 readings
  1. 2002Rebuilding a long-stock book with calls, puts and collars
  2. 2004Constructing protective collars and reading cheap premia
  3. 2004Protective collar, straddle exits, and index settlement
  4. 2005Collar and backspread construction as a pairing problem
  5. 2006Protective collar, net delta, and implied volatility
  6. 2007Interest as a sizing filter on collared stock
  7. 2008Collar versus bull call spread: capital and inventory
  8. 2008A long-stock case that sizes cash risk, then stays open with a protective put, covered calls, and a collar
  9. 2008Assignment as a planned handoff from put spread to collar
  10. 2008Protective collar rolls and straddle entry in extreme volatility
  11. 2010A margin call is a late exam in position size
  12. 2011Protective collars and covered calls after a volatility shock
  13. 2011Mid-life butterfly and collar adjustments across range and correction
  14. 2012Stacking a 1-by-2 overlay and a collar on underwater stock
  15. 2013Odd-lot mini-options for covered calls, puts, and collars
  16. 2014Zero-debit call-ratio repair for a broken long stock
  17. 2014An open collar funds the puts without capping every share
  18. 2018A protective collar as an event-risk budget
  19. 2020Constructing position-level collars around unsold holdings
By fieldOptions and volatility435 readingsBy year2018172 readings
All 20 readings tagged Protective collar
Also on Protective collar5 readings
2002Rebuilding a long-stock book with calls, puts and collars2004Constructing protective collars and reading cheap premia2004Protective collar, straddle exits, and index settlement2005Collar and backspread construction as a pairing problem2006Protective collar, net delta, and implied volatility