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.

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 a collar strategy?

The use of a collar strategy is also used in mergers and acquisitions. In a stock deal, a collar can be used to ensure that a potential depreciation of the acquirers stock does not lead to a situation where they must pay much more in diluted shares.

Can collar options make a profit if the stock price goes up?

The idea behind the collar options strategy is that the investor can potentially make a profit if the stock price goes up while simultaneously limiting their downside risk if the stock price falls. Collar options can be a great way to protect your portfolio from downside risk while still allowing you to make some profits if the stock price goes up.