DEFINITION of 'Collar'

1. A protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing an out of the money put option while simultaneously writing an out of the money call option.

Also known as "hedge wrapper".

2. A general restriction on market activities.


Loading the player...


1. The purchase of an out-of-the money put option is what protects the underlying shares from a large downward move and locks in the profit. The price paid to buy the puts is lowered by amount of premium that is collect by selling the out of the money call. The ultimate goal of this position is that the underlying stock continues to rise until the written strike is reached.

2. An example is a circuit breaker which is meant to prevent extreme losses (or gains) once an index reaches a certain level.

Collars can protect you against massive losses, but they also prevent massive gains.

  1. Collar Agreement

    An arrangement in a merger and acquisition deal that protects ...
  2. Out Of The Money - OTM

    A call option with a strike price that is higher than the market ...
  3. Circuit Breaker

    Refers to any of the measures used by stock exchanges during ...
  4. Covered Call

    An options strategy whereby an investor holds a long position ...
  5. Ceiling

    The maximum level permissible in a financial transaction. Ceiling ...
  6. Floor

    The lowest acceptable limit as restricted by controlling parties. ...
Related Articles
  1. Options & Futures

    Top 4 Apps for Option Traders

    Discover some of the most popular apps that options traders use so they can stay on top of market opportunities and manage their investments.
  2. Investing Basics

    How Does a Collar Work?

    Collar refers to a protective options strategy that investors use after a stock has experienced substantial gains.
  3. Investing Basics

    Solutions For Concentrated Positions

    Investopedia explains various tactics for divesting your overexposure to any one stock.
  4. Options & Futures

    Market Volatility Strategy: Collars

    Find out which protective or bullish collar will result in your optimal risk/return level.
  5. Options & Futures

    Using LEAPS With Collars

    This options strategy will help you lock in profit while keeping your upside potential.
  6. Options & Futures

    Cut Down Option Risk With Covered Calls

    A good place to start with options is writing these contracts against shares you already own.
  7. Options & Futures

    Don't Forget Your Protective Collar

    Guard your finances in uncertain times with a protective collar strategy, which provides short-term downside protection.
  8. Options & Futures

    Use Married Puts To Protect Your Portfolio

    Learn how put options can act as insurance for volatile stocks in your portfolio.
  9. Options & Futures

    Trade Smarter With Equivalent Positions

    Understanding the concept of equivalent positions will help you trade more efficiently and save money on trade fees.
  10. Options & Futures

    Costless Collars: Because Asset Allocation Is Not Enough

    Collars are extremely flexible, and can be much more beneficial to your portfolio than asset allocation.
  1. What are the best options strategies for investing in the real estate sector?

    Two options strategies that investors can use to their advantage in the real estate sector are the married put strategy, ... Read Full Answer >>
  2. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  3. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  4. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  5. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
  6. How do I determine the breakeven point for a short put?

    The breakeven point for a short put is the strike price of the option minus the premium. Selling puts is a way for traders ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  2. Bullish Engulfing Pattern

    A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses ...
  3. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  4. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
Trading Center