Collar
Hold the underlying, buy a protective put, and sell a call to finance it — capping both downside and upside.
What is a Collar?
A Collar wraps a long position in the underlying with a protective long put (downside insurance) and a short call (which finances that insurance). The result is a defined band: losses are capped below the put strike and gains are capped above the call strike. Often the call premium nearly offsets the put cost, creating a low-cost or 'zero-cost' collar. It is the standard way institutions protect large holdings cheaply.
Payoff Diagram
Profit & Loss at expiry
Per share (multiply by lot size 75). Gold dots mark breakeven points; green = profit, red = loss.
Construction
- Own the underlying (1 lot / 100 shares).
- Buy 1 OTM Put for downside protection.
- Sell 1 OTM Call to fund the put. Net cost is small or zero.
When to Use It
Use to protect an existing position or lock in gains at low cost, when you are willing to cap upside in exchange for cheap insurance. Popular ahead of uncertain events for holders who cannot or do not want to sell.
The Greeks
Reduced net Delta, low Vega, low Theta — the long put and short call offset much of each other's Greeks.
Risks & Considerations
- Upside is capped at the call strike — you forgo a strong rally.
- If the underlying is called away, you may face tax or delivery consequences.
- The protective band is fixed; a move beyond either strike is fully capped.
Worked Example (Nifty)
Illustrative trade — lot size 75
Hold Nifty at 20,000. Buy 19,600 PE ₹150, sell 20,400 CE ₹130. Net cost ₹20 (₹1,500). Downside capped near 19,600 (max loss ≈ (400 + 20) × 75 = ₹31,500). Upside capped near 20,400 (max gain ≈ (400 − 20) × 75 = ₹28,500). Between the strikes you track the underlying.