Collar

AAA

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.

RELATED TERMS
  1. Collar Agreement

    An arrangement in a merger and acquisition deal that protects ...
  2. Circuit Breaker

    Refers to any of the measures used by stock exchanges during ...
  3. Married Put

    An option strategy whereby an investor, holding a long position ...
  4. Trading Halt

    A temporary suspension in the trading of a particular security ...
  5. Ceiling

    The maximum level permissible in a financial transaction. Ceiling ...
  6. Strike Price

    The price at which a specific derivative contract can be exercised. ...
RELATED FAQS
  1. What options strategies are best suited for investing in the aerospace sector?

    The best options strategies for investing in the aerospace sector exploit the sector's volatility and propensity for big ... Read Full Answer >>
  2. What options strategies are best suited for investing in the Internet sector?

    The long straddle and long strangle options strategies enable investors to capitalize on the Internet sector's volatility. ... Read Full Answer >>
  3. How many attempts at the Series 7 exam are permitted?

    The National Association of Securities Dealers (NASD) has not placed any limits on the number of times you can attempt to ... Read Full Answer >>
  4. Where can I buy covered call ETFs (exchange-traded funds)?

    Covered calls can be traded through any major retail broker. Investors need to have their brokerage accounts approved for ... Read Full Answer >>
  5. How do I set a strike price in a put?

    The strike price of a put option is the price at which the option can be exercised. A put option gives the buyer, or holder, ... Read Full Answer >>
  6. How can I profit from a decline in the drugs sector?

    Profit from a decline in the drugs sector by short selling or by purchasing futures contracts or put options. Investors use ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Solutions For Concentrated Positions

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

    Market Volatility Strategy: Collars

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

    Using LEAPS With Collars

    This options strategy will help you lock in profit while keeping your upside potential.
  4. 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.
  5. 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.
  6. Options & Futures

    Use Married Puts To Protect Your Portfolio

    Learn how put options can act as insurance for volatile stocks in your portfolio.
  7. 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.
  8. 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.
  9. Options & Futures

    Minimize Risk With The Long Collar

    Think your favorite stock is on the way down? This simple option-trading strategy can help you manage your risks without selling the stock.
  10. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.

You May Also Like

Hot Definitions
  1. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
  2. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  3. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  4. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  5. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  6. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
Trading Center