Collar Strategy: Cap Risk and Lock In Gains 2026
The collar strategy combines a covered call with a protective put to create a defined-risk position on stock you already own. You give up some upside in exchange for downside protection — often at zero net cost. It's the professional way to protect profits without selling your shares.
What Is a Collar Strategy?
A collar involves three components: 100 shares of stock you already own, a protective put (bought below the current price), and a covered call (sold above the current price). The premium collected from selling the call offsets some or all of the cost of buying the put.
When the call premium equals the put premium, you have a "zero-cost collar" — free downside protection in exchange for capping your upside. This is extremely popular with executives, large shareholders, and anyone with a concentrated position they need to protect.
The collar creates a defined range of outcomes. Below the put strike, you're protected. Above the call strike, your shares get called away. In between, you hold your shares normally. It's like putting guardrails on both sides of the highway.
Example: You own 100 shares of MSFT at $100 (now trading at $200). You want to protect your $10,000 gain. You buy a $190 put for $4.00 and sell a $215 call for $4.00. Net cost: $0. Your outcomes: if MSFT drops below $190, you sell at $190 (locking in $90/share profit). If MSFT rises above $215, your shares are called away at $215 ($115/share profit). Between $190-$215, you hold normally. You've locked in a minimum $90/share gain at zero cost.
When to Use It
- When you have a large unrealized gain and want to protect it before year-end or an event
- When an executive or insider needs to hedge a concentrated position
- When you want to hold shares for tax reasons (avoid triggering capital gains) but need protection
- When implied volatility is elevated — the call premium is worth more, making the collar cheaper
- When you're willing to accept a cap on your upside in exchange for a guaranteed floor
How to Set It Up
1. Own (or buy) 100 shares of the underlying stock 2. Buy 1 OTM put — typically 5-10% below current price (this is your floor) 3. Sell 1 OTM call — typically 5-10% above current price (this is your ceiling) 4. Match expirations on both options (60-90 days is common) 5. Aim for a zero-cost or near-zero-cost collar by matching premiums 6. At expiration: let the put protect you if the stock drops, or let shares be called away if it rises
Risk & Reward
Max profit: Call strike - current stock price (capped at the call strike) | Max loss: Current stock price - put strike (floored at the put strike) + any net debit paid | Breakeven: Current stock price +/- net debit or credit. In a zero-cost collar, breakeven is the current stock price.
Best Brokers for This Strategy
IBKR is the top choice for collars — low commissions on the multi-leg trade and best execution on wide-spread options. Tastytrade's free-to-close model works well since you may want to remove the collar early. thinkorswim/Schwab has the best risk profile visualization for understanding your collar's payoff. See our tastytrade review.
Not financial advice. Always do your own research.
Tastytrade is built for options traders — the best platform for covered calls, cash-secured puts, and spreads.
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