Collar (finance)

In finance, a collar is an option strategy that limits the range of possible positive or negative returns on an underlying to a specific range.

Equity collar

Structure

A collar is created by:

These latter two are a short risk reversal position. So:

The premium income from selling the call reduces the cost of purchasing the put. The amount saved depends on the strike price of the two options.

Most commonly, the two strikes are roughly equal distances from the current price. For example, an investor would insure against loss more than 20% in return for giving up gain more than 20%. In this case the cost of the two options should be roughly equal. In case the premiums are exactly equal, this may be called a zero-cost collar; the return is the same as if no collar was applied, provided that the ending price is between the two strikes.

On expiry the value (but not the profit) of the collar will be: