Snapshot
Legs
Buy 100 Shares of Stock + Buy 1 Out-of-the-Money Put + Sell 1 Out-of-the-Money Call
Outlook
Moderately Bullish
Max profit
Call strike price minus stock purchase price net of option costs
Max Loss
Stock purchase price minus Put strike price net of option costs
A protective collar option strategy is formed by owning shares of stock, buying an out-of-the-money put option, and selling an out-of-the-money call option. The fee collected from selling the call option usually covers most or all of the cost of buying the put option. Stockholders implement this approach when they want to lock in gains and limit downside risk without spending much extra money.
Your potential profit is capped at the call option's strike price, as you must sell your shares if the stock rises past that point. In return for capping your gains, your maximum downside loss is strictly limited by the put option strike price, shielding your portfolio from severe declines.
Example
Stock
$100
Trade
- Buy 100 shares at $100
- Buy $95 Put for $2.50
- Sell $105 Call for $2.50
→ $0.00 net option cost + $10,000 for 100 shares
Breakeven
$100.00
Outcomes
- Stock ≥ $105: +$500 Max Profit
- Stock at $100: $0 Breakeven
- Stock ≤ $95: -$500 Max Loss