What is a protective collar hedging strategy?

Here, we go over the mechanics of initiating this hedging strategy. A collar is an options strategy implemented to protect against large losses, but which also puts a limit on gains. The protective collar strategy involves two strategies known as a protective put and covered call.

What is a 'collar' in finance?

In finance, the term "collar" usually refers to a risk management strategy called a protective collar involving options contracts, and not a part of your shirt. But, using a protective collar could keep you from losing your shirt when then the value of your investments tank.

What is a collar option strategy?

A collar option strategy is an options strategy that limits both gains and losses. A collar position is created by holding an underlying stock, buying an out of the money put option, and selling an out of the money call option. Collars may be used when investors want to hedge a long position in the underlying asset from short-term downside risk.

What is an equity collar & how does it work?

The loss in a protective collar is limited, but so is the potential upside. An equity collar is created by selling an equal number of call options and buying the same number of put options on a long stock position. Call options give purchasers the right, but not the obligation, to purchase the stock at the determined price, called the strike price.