Protective collar
OptionsIntermediate
A collar holds the underlying, buys a put, and sells a call to help pay for the put. The put sets a floor. The call sets a ceiling. Cboe's CLL index is a published version of a collar on the S&P 500. It is a risk-reduction overlay. The net debit or credit depends on the strikes, and the stock can still lose money down to the put.
Not investment advice. Nothing here is a recommendation to buy or sell anything. Backtests and historical studies are not guarantees, and a rule that worked in one sample can fail in the next. Trading can lose money. Links are for education, not endorsements. Do your own research.
- Rules
- Own the underlying. Buy a downside put and sell an upside call with the same expiration, in a ratio of one option per share or index unit. Hold for the stated horizon, often three months in benchmark collars, then roll. Choose strikes from a rule, such as a target delta, not from the strike that would have worked last quarter. Know the net debit before you trade.
- Where AI fits
- AI can solve for strikes that match a stated delta or a stated max loss, and it can show the expiration payoff including dividends. It should flag early-exercise and ex-dividend conflicts on the short call. It should not describe a collar as free insurance unless the net premium really is zero at those strikes.
- Markets
- Equity indexes in the benchmark version, and single stocks if the holder already owns the shares.
- Timeframes
- Weeks to a few months, matching the option expiration.
- Risks
- The call caps a rally. The put strike can be far below spot, so the 'floor' still allows a large loss. Rolling in a crash is expensive because the new put is rich. A collar on the wrong quantity leaves a naked option. Path dependency between rolls is easy to ignore in a sketch.