A collar is a way to protect shares you already own. It combines three things: the shares, a bought put option below the current price, and a sold call option above the current price, both with the same expiry. The put sets a minimum price you can sell at; the call sets a maximum. The stock's result is fenced in between the two, like a collar around a neck.
It joins two simpler strategies. Owning shares with a bought put is a protective put: full protection, but the put costs money. Owning shares with a sold call is a covered call: extra income, but capped gains. A collar uses the call's income to pay for the put's protection.
Collar = own shares + buy a lower-strike put + sell a higher-strike call
A worked example on a stock at ₹1,000
You own shares of a large Indian company trading at ₹1,000. Results are due within the month and you want to limit the damage of a bad surprise without selling. Using the monthly options:
- Buy the 950 put at ₹15 (the floor, 5% below the price)
- Sell the 1,060 call at ₹14 (the cap, 6% above)
Net cost: ₹1 per share. Here is the result per share at expiry, compared with holding the shares alone:
| Stock at expiry (₹) | Shares alone | Put value | Call value (owed) | Collar result |
|---|---|---|---|---|
| 850 | −150 | 100 | 0 | −51 |
| 950 | −50 | 0 | 0 | −51 |
| 1,000 | 0 | 0 | 0 | −1 |
| 1,060 | +60 | 0 | 0 | +59 |
| 1,150 | +150 | 0 | −90 | +59 |
The worst case is a loss of ₹51 a share, however far the stock falls. The best case is a gain of ₹59 a share, however far it rises. Between 950 and 1,060, the collar behaves like the shares with a ₹1 cost. Stock options trade in fixed lots, so you can only collar a holding in multiples of the lot size; check the current lot size for the stock on NSE.
The zero-cost collar
If the call premium equals the put premium, the collar costs nothing up front. That is the zero-cost collar, and it is popular because it feels free. It is not free: you pay with the gains you give up above the call strike. In the example, if the stock had rallied to ₹1,150 on great results, the collar holder would have earned ₹59 a share instead of ₹150.
The strikes you can get for zero cost depend on implied volatility and on the skew between puts and calls. In Indian markets, out-of-the-money puts often cost more than calls the same distance away, so a zero-cost collar usually needs a call closer to the price than the put. When volatility is high, both options cost more, but the put usually more so.
The live box below shows where implied volatility stands compared with its past year:
When IV rank is high, protection is expensive, so a collar's sold call does more of the work of paying for the put. When it is low, protection is cheaper and some investors prefer a plain protective put to keep the upside.
Choosing the strikes and expiry
Every collar is a trade-off between three numbers: how low the floor is, how high the cap is, and what it costs. Moving one moves the others.
- A higher floor (a put closer to the price) gives more protection but costs more, so the call must be sold closer too, lowering the cap.
- A higher cap (a call further away) leaves more upside but brings in less premium, so the collar costs more or the floor must drop.
- A longer expiry protects for longer and saves on rolling, but stock options beyond the next month are often thinly traded in India, so prices can be poor.
A practical way to start: decide the largest loss you are willing to take on the holding, put the floor there, then find the call strike whose premium covers as much of the put as you need. Write down the resulting cap and ask whether you are truly comfortable selling at that price.
Looking at the stock before you collar it
A collar is a decision about one holding, so start with the stock itself. For example, here is the technical summary for HDFC Bank:
Look at the trend and how far the price sits from its recent highs and lows. A put just below a level the stock has bounced from many times may never be needed; one below a breaking trend may be. This is context for strike choice, not a forecast.
Collaring a portfolio with index options
If you hold many stocks or an index fund, collaring each stock is costly and many stocks have thin option markets. An index collar uses NIFTY options instead: buy a NIFTY put below the market and sell a NIFTY call above it, sized to the portfolio. The protection is only as good as the match between your portfolio and NIFTY. The NIFTY puts hedging guide explains sizing with beta and the costs involved.
Index options settle in cash, which avoids the delivery issue below. You can see the strikes and premiums for an index collar on the NIFTY option chain.
Settlement, expiry and tax points
- Physical settlement. Stock options in India are settled by delivery. If the call ends in the money, your shares are delivered against it at the call strike; if the put ends in the money, you deliver shares and receive the put strike. That is usually the intended result of a collar, but it can trigger a capital gain you did not plan. The physical settlement guide explains the process.
- No early exercise. NSE stock and index options are European style: they can only be exercised at expiry, so the sold call cannot be exercised against you early.
- Rolling. Monthly options mean protection lasts a month at a time. Rolling a collar every month adds costs and taxes each time.
- Tax. Option profits and losses are usually treated differently from the gains on shares held for investment. The rules change and depend on your situation, so check with a tax adviser.
When investors use collars
- Before a known event, such as results, when the investor does not want to sell but wants a floor.
- After a large gain, to lock in most of it while still holding the shares.
- When a holding has become a large share of the portfolio and selling is not practical right away.
Common mistakes
- Forgetting the cap. A collar gives up the big upside, which is often the reason to own the stock.
- Mismatched quantities. Selling more calls than shares owned turns part of the call into a naked short.
- Collaring illiquid options. Wide bid-ask spreads on thinly traded stock options can cost more than the protection is worth.
- Leaving it to expiry without a plan. Decide in advance whether to roll, close or accept delivery.