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.
INVESTOPEDIA EXPLAINS 'Collar'
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.
An arrangement in a merger and acquisition deal that protects ...
A call option with a strike price that is higher than the market ...
A temporary restriction on program trading in a particular security ...
A temporary suspension in the trading of a particular security ...
An option strategy whereby an investor, holding a long position ...
The price at which a specific derivative contract can be exercised. ...