what is a collar 
a collar also known as a hedge wrapper or risk reversal is an options strategy used to protect against significant losses but also limits your potential profits it s used when you re optimistic about a stock you own long term but worry about short term volatility in the market an investor who already owns an underlying a stock or other asset creates a collar by buying an out of the money put option which protects against the stock price going down at the same time the investor writes an out of the money call option where the current price is lower than the option s strike price this produces income from selling the call option which hopefully at least covers the cost of buying the put option it also allows the trader to profit on the asset up to the call s strike price but not higher thus the strategy caps the potential profit at the call option s strike price as such while the collar options strategy can protect against significant losses it limits potential gains we explain in this more and clearer detail below investopedia sydney burnsunderstanding a collarinvestors typically use collars if they own a stock whose value is higher than when they bought it and they are optimistic about the stock going up but unsure of its shorter term prospects to protect their gains against a downside move in the stock they can carry out the collar option strategy the best outcome for an investor is when the stock s price matches the set price of the call option they ve sold right when the option is about to expire 1the collar strategy combines two methods buying a put to protect against price drops and selling a call to earn some money upfront let s break this down here s your checklist for carrying this out this setup is ideal if you don t want to spend extra money and are fine with not getting the profits should the stock go up higher than you thought thus this is not the best choice if you re very bullish on a stock a fence is a similar risk reversal strategy that uses three option actions collar break even point and profit or lossfor investors using a collar strategy their break even point is calculated by looking at the difference between what they spent and what they earned from the options when they end up with more money from the options than they paid a net credit they add this extra to the stock s purchase price if they spent more on the options than they got back a net debit they subtract this from the stock s purchase price you need the stock to end at this final number so you break even the most investors can make from a collar strategy is found by looking at how high the call option s preset sell price is above what they originally paid for the stock after considering the costs or gains from dealing with the options the biggest loss they can face is the difference between what they paid for the stock and the safety net price set by the put option again after accounting for the options costs or gains how to calculate this is below for each possible outcome protective collar examplesuppose you own 100 shares of stock abc bought originally at 80 per share and the stock is trading at 87 per share you want to temporarily hedge the position since there s been volatility in the overall market you buy one put option note that one stock option contract is 100 shares with a strike price of 77 and a premium of 3 00 you also write sells one call option with a strike price of 97 with a premium of 4 50 