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 strategy?

A collar is an options strategy used by traders to protect themselves against heavy losses. The strategy, also known as a hedge wrapper, involves taking a long position in an underlying stock, buying an out-of-the-money put, and selling an out-of-the-money call.

When should a trader use a collar?

A trader uses a collar when they are bullish on the underlying stock but want to be protected against the risk of large losses. A collar is also a useful option strategy when the goal is to protect unrealized gains on the stock. How Do Collars Work?

What is the maximum profit on a collar option?

The maximum profit on a collar is when the stock price rallies up to the call’s strike price. Above that level, gains are constant since the long stock position is offset by the short call. What is maximum loss on a collar option? The maximum loss on a collar option trade is when the stock price declines to the put’s strike price.