Collar

Core Thesis

A Collar is a risk-budgeted equity overlay: long stock plus long put financed partially or fully by a short call. It defines a downside floor and an upside cap.

Structure

• Long 100 shares at $S_0$.
• Long put strike $K_p$.
• Short call strike $K_c$ where typically $K_p < K_c$.
• Net option cost: $D = P_0 - C_0$ (debit if positive, credit if negative).

Expiration Payoff Mathematics

$$\Pi_T = (S_T - S_0) + \max(K_p - S_T, 0) - \max(S_T - K_c, 0) - D$$

• Max gain: $K_c - S_0 - D$.
• Max loss: $S_0 - K_p + D$.
• Break-even: $S_0 + D$.

Greek and Volatility Profile

• Delta positive but reduced versus naked stock.
• Theta near neutral when call premium offsets put decay.
• Vega depends on strikes/tenor but often near flat versus protective put alone.
• Tail risk is materially reduced compared with long stock.

Design Rules

• Put strike from max acceptable drawdown.
• Call strike from acceptable upside sacrifice.
• Zero-cost collar targeting $P_0 \approx C_0$ is common for mandate-driven risk control.

Management Framework

• If stock rallies near call strike and upside thesis remains strong, roll call higher/out.
• If downside risk subsides, close put and reprice hedge.
• Monitor early assignment risk for deep ITM calls near ex-dividend.

Failure Modes

• Selling calls too close to spot and locking out expected upside.
• Choosing too-low put strike that fails mandate drawdown objective.
• Treating collar as static when regime and thesis evolve.

Practical Checklist

• Are floor and cap consistent with portfolio mandate, not just premium minimization?
• Is the opportunity cost of capped upside explicitly accepted?
• Is there a predefined roll policy for both option legs?