What is a collar option?

What Is a Collar? A collar, also known as a hedge wrapper or risk-reversal, is an options strategy implemented to protect against large losses, but it also limits large gains. An investor who is already long the underlying creates a collar by buying an out-of-the-money put option while simultaneously writing an out-of-the-money call option.

What is a collar in stock trading?

Here, a collar includes a long position in an underlying stock with the simultaneous purchase of protective puts and the sale of call options against that holding. The puts and the calls are both out-of-the-money options having the same expiration month and must be equal to the number of contracts.

What are collars & how do they work?

Collars are one way for advanced individual investors to limit their potential losses on an investment in exchange for limiting their gains. Compared to traditional stock trades, they carry a higher degree of risk than is typically associated with trading options.

How much does it cost to implement collar?

The investor purchases 10 put options (one option contract is 100 shares) with a strike price of $77 and a premium of $3.00 and writes 10 call options with a strike price of $97 with a premium of $4.50. Cost to implement collar (Buy $77 strike Put & write $97 strike call) is a net credit of $1.50 / share.