Collar Strategy

The Collar Strategy is a smart, low-risk options strategy that many investors use to protect their stock profits while still giving their shares some room to grow. It’s like putting a safety belt on your investment so that big market drops don’t wipe out your gains.

What Is a Collar in Options Trading?

A Collar involves three parts:

You own the underlying stock.
You buy a protective put option to limit your downside risk.
You sell a covered call option to earn some premium and help pay for the put.

This combo “collars” your stock’s price movement within a range. You protect your losses but cap your gains too.

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How Does a Collar Work?

Let’s break it down with an example:
- You bought a stock at ₹500 per share.
- Now it’s trading at ₹600. You want to lock in profits but also stay invested.
- You buy a put option with a ₹580 strike price. This means if the stock falls below ₹580, you can still sell it for ₹580.
- To pay for the put, you sell a call option with a ₹620 strike price. If the stock goes above ₹620, you have to sell it at that price.
So, you create a price “collar” — your minimum selling price is ₹580, and your maximum is ₹620.

When Do Traders Use a Collar Strategy?

When you want to protect profits in a stock that has gone up a lot.
When you expect the market might become volatile or fall soon.
When you want to limit losses without fully selling your shares.
When you want to reduce the cost of protection by selling a call.

Key Benefits of the Collar Strategy

✔️ Downside Protection: The put option protects you if the stock price drops sharply.
✔️ Earn Premium: The covered call gives you extra income that can cover the cost of the put.
✔️ Limited Risk: You know your worst-case and best-case scenarios in advance.
✔️ Stay Invested: You don’t have to sell your shares right away.

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Possible Drawbacks to Keep in Mind

1.  Limited Upside: If the stock price soars above the call’s strike price, you miss out on those extra gains because you have to sell at that level.
2.  Complexity: It’s more complex than just holding the stock because you manage multiple options contracts.
3.  Needs Monitoring: You may need to adjust your options if the stock price moves too far or expiry dates come close.

Example Scenario

Let’s say you own 100 shares of a company at ₹500. Now it’s ₹600.
- You buy a put with a ₹580 strike (costs ₹5 per share).
- You sell a call with a ₹620 strike (earns ₹5 per share).
The premium from the call pays for the put, so your protection is free.
- If the stock drops to ₹550, you can still sell for ₹580.
- If the stock rises to ₹650, you must sell for ₹620.
If it stays between ₹580 and ₹620, you keep your stock and the options expire.

Quick Summary Table

Here’s a quick look at how the Collar Strategy works:

Feature	Details
Market View	Neutral to slightly bullish
What You Do	Own stock + Buy put + Sell call
Downside Protection	Yes – through the put option
Upside Profit	Limited – capped by the covered call
Cost	Lowered by premium from the sold call option
Best For	Protecting gains while staying invested

The Collar Strategy is like a safety net for investors who want to keep stock profits safe without exiting their position entirely. It’s a practical strategy used by many experienced traders and can be a great tool for risk management when used smartly.