---
description: "A hedging strategy (fence) buying stock, buying an OTM put at K1, and selling an OTM call at K2 > K1, capping both upside and downside within a defined range."
tags: [options, hedging, bullish, collar]
---

# Collar

**Section**: 2.53 | **Asset Class**: Options | **Type**: Hedging

## Overview
The collar (a.k.a. "fence") is a covered call augmented by a long put option as insurance against the stock price falling. It amounts to buying stock, buying an OTM put at K1, and selling an OTM call at K2 (K2 > K1). The trader's outlook is moderately bullish. This is a capital gain strategy. Note: a short collar is a covered put augmented by a long call option.

## Construction
- Buy 1 share of stock at S0
- Buy 1 OTM put option at strike K1 (K1 < S0), paying put premium
- Sell 1 OTM call option at strike K2 (K2 > S0 > K1), receiving call premium

Net debit or credit H (= D if net debit, = -C if net credit)

## Payoff Profile
f_T = S_T - S0 + (K1 - S_T)+ - (S_T - K2)+ - H

- Breakeven: S* = S0 + H
- Max profit: P_max = K2 - S0 - H  (if S_T >= K2; upside capped by short call)
- Max loss: L_max = S0 - K1 + H  (if S_T <= K1; downside protected by long put)

## Key Conditions / Signals
- Moderately bullish; willing to cap upside in exchange for downside protection
- Ideal when trader has existing long stock position and wants to protect gains
- Often structured as zero-cost (H = 0) by choosing K1 and K2 such that premiums offset

## Notes
The collar sacrifices unlimited upside potential (capped at K2) in exchange for limiting downside loss (floored at K1). It is one of the most common hedging strategies for long equity holders. A zero-cost collar is popular for protecting unrealized gains.