Definition
Collar
A collar holds the stock, buys a protective put, and sells a covered call to fund the put — capping both downside and upside.
You own the shares, buy an out-of-the-money put for downside insurance, and sell an out-of-the-money call to pay for that put. The result is a defined band: you are protected below the put strike and give up gains above the call strike, often at little or no net premium cost.
Indian investors use collars to protect large delivery holdings — say a concentrated position in an IT or bank stock — through an uncertain period without paying much for insurance. It combines the protective put and covered call into one risk-managed structure, ideal when you want to hold the stock but lock the range.
Related terms
- Covered CallA covered call means holding the underlying shares and selling a call option against them to earn premium.
- Protective PutA protective put is buying a put option on shares you own to insure against a fall in price.
- Synthetic LongA synthetic long replicates owning the underlying by buying a call and selling a put at the same strike.
- HedgingHedging is taking an offsetting position to protect a portfolio against adverse price moves, like insurance for your investments.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.