Covered Call
Own the stock and sell a call against it to earn premium income. You give up some upside in exchange for getting paid while you hold.
Learn strategyBullish3 LegsDefined risk
Collar
Hold the stock, buy a protective put, and pay for it by selling a call. A hard floor under your losses in exchange for a ceiling on your gains.
By Team Agora Circle
Written by the Agora Circle editorial team. Educational content, explained for the Indian market. Not investment advice.
- Market outlook
- Cautiously bullish. You want to stay invested but cannot afford a large drawdown.
- Setup
- Own the shares, buy 1 protective put below the market, sell 1 call above it.
- Max profit
- Capped at the call strike minus the entry price, adjusted for net premium.
- Max loss
- Capped at the entry price minus the put strike, adjusted for net premium.
- Breakeven
- Entry price plus the net premium paid (or minus the net credit received).
- Implied volatility
- Broadly neutral. The long put and short call largely offset each other's volatility exposure.
- Time decay
- Roughly neutral. Decay on the put is funded by decay on the call.
Strategy Overview
A collar wraps an existing stockholding between two options: a put bought below the market that acts as an insurance floor, and a call sold above the market whose premium pays the insurance bill. Structured carefully, the two premiums cancel, producing the famous zero cost collar.
The result is a position with both edges rounded off. However hard the stock falls, the put lets you exit at its strike. However hard it rallies, the call hands the excess above its strike to someone else. In between the band, the shareholding behaves exactly as it always did.
Collars shine when an investor must hold a position but cannot stomach its downside: a concentrated holding from ESOPs, a stake awaiting a better tax date, or a portfolio entering a stretch of known event risk. It converts an open ended exposure into a defined one without selling a single share.
How to Set It Up
Three legs in total, with the share quantity matched to the option lot size so both options are fully covered by the holding.
- 1Own (or buy) the underlying shares in the option lot quantity.
- 2Buy 1 put (PE) at a strike below the market at your maximum acceptable loss level.
- 3Sell 1 call (CE) at a strike above the market, choosing it so the call's premium offsets most or all of the put's cost.
Payoff Diagram and Example
Max Profit
Capped at the call strike minus the entry price, adjusted for net premium.
Max Loss
Capped at the entry price minus the put strike, adjusted for net premium.
Breakeven
Entry price plus the net premium paid (or minus the net credit received).
Suppose you hold a stock at Rs 1,000 into an uncertain quarter. You buy the 950 put for Rs 15 and sell the 1,050 call for Rs 15. The premiums cancel: a zero cost collar with a floor at 950 and a cap at 1,050.
If the stock crashes to 850, the put lets you exit at 950. Your worst case is a loss of Rs 50 per share, no matter how ugly the fall gets. Without the collar the same move costs Rs 150.
If the stock rallies to 1,150, your shares are effectively called away at 1,050, for a maximum gain of Rs 50 per share. Between 950 and 1,050 at expiry, both options expire worthless and you simply own the stock at its market price, having paid nothing for a quarter of insurance.
Entering and Exiting
Enter the two option legs together, ideally as simultaneous limit orders, once the share position is in place. The net cost depends on the strikes you pick: a tighter floor costs money, a symmetric band is usually near zero.
Most collars are simply held to expiry. If the stock sits inside the band, both options die worthless and you decide afresh whether the next period needs another collar.
To exit early, unwind the option legs first, then deal with the shares. If the stock has fallen toward the put strike, that put now carries real value; selling it captures the insurance payout without giving up the shares.
Time Decay (Theta)
The collar is close to theta neutral: the time value draining from your long put is offset by the decay you earn on the short call. This is what makes it a cheap position to sit in compared with buying puts alone.
The balance shifts with the stock. Near the call strike the position collects decay; near the put strike it bleeds slightly. In the middle, the effect is small either way.
Implied Volatility (Vega)
Being long one option and short another leaves the collar roughly vega neutral, so IV changes matter far less than they would for a lone protective put.
IV still matters at entry. When volatility is high, the call you sell is rich, letting you afford a closer put strike for the same zero cost. Calm markets buy thinner protection per rupee of surrendered upside.
Common Adjustments
After a strong rally toward the call strike, the collar can be rolled up: close both options and rebuild the band around the new, higher price. This banks part of the gain and resets the floor higher.
After a fall, sell the appreciated put and re-strike lower, or exit the position entirely if the thesis for holding the stock has changed. The put's payout is only realised if you act on it.
If you become fully bullish again, lift just the call leg and keep the put. The position becomes a protective put: full upside restored, insurance intact, at the cost of the debit you pay to buy back the call.
Synthetic Equivalent
A collar caps both ends of a stock position, so its payoff is identical to a bull call spread at the same two strikes. The floor from the long put and the ceiling from the short call produce the same bounded shape.
Seen another way, it is a protective put whose cost is funded by selling a covered call, which is why it is often set up for little or no net premium.
Pros and Cons
Pros
- Hard, known floor under the stock through the put.
- Often costs nothing: the sold call finances the protection.
- Lets you keep holding through turbulence instead of selling in fear.
- Roughly neutral to time decay and volatility swings.
Cons
- Upside is capped at the call strike for the life of the collar.
- The band must be re-established every expiry, with fresh decisions and costs.
- Physical settlement of stock options requires attention in expiry week.
- A stock that whipsaws inside the band pays nothing for the effort.
Frequently Asked Questions
What makes a collar zero cost?
The strikes are chosen so the premium received for the call equals the premium paid for the put. The protection is not free in an economic sense; it is paid for by surrendering the upside beyond the call strike rather than with cash.
When does a collar make more sense than just buying a put?
When the recurring cost of puts is the obstacle. Insurance that costs 1.5 percent per month compounds into a serious drag over a year. A collar removes most or all of that cash cost, which suits investors whose priority is surviving a drawdown rather than capturing every rupee of a rally.
How do I choose the two strikes?
Start from the floor: place the put at the largest loss you can genuinely tolerate. Then find the call strike whose premium pays for that put. If the resulting cap feels too tight, either accept a small net cost for a wider band or accept a lower floor.
Can I collar an index position?
The same structure works around a long index futures or ETF position using NIFTY options, and cash settlement makes expiry mechanics simpler than with stocks. The classic share based collar, though, is a single stock hedge.
What happens if the stock finishes between the two strikes?
Both options expire worthless. You still own the shares at the market price, and the collar's net premium (often zero) was the only cost. Many collars end exactly this way, which is fine: insurance that goes unused is not wasted, it was protection you fortunately did not need.
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Learn strategyThis page is for education only. It is not investment advice, and nothing here is a recommendation to buy or sell any instrument. Options involve substantial risk, and option sellers can lose far more than the premium they receive. Please do your own research or consult a SEBI registered investment adviser before trading. Read our full disclaimer.