A collar is an options strategy that consists of buying or owning the stock, and then buying a put option at strike price a, and selling a call option at strike price b. An options trader who enters this strategy wants the stock to trade higher and get called away at the call strike price b.
collar options strategy a collar is similar to covered call but involves another position of buying a put option to cover the fall in the price of the underlying. It involves buying an atm put option & selling an otm call option of the underlying asset. It is a low risk strategy since the put option minimizes the downside risk.
Collar credit (short call strike - share purchase price) credit x 100. Collar debit (short call strike - share purchase price) - debit x 100. Max loss potential collar credit (share purchase price - long put strike) - credit x 100. Collar debit (share purchase price - long put strike) debit x 100.
A collar trade is an options insurance strategy on a stock or exchange traded fund (etf) or even on long term call options known as leaps.
For example, you could pay some premium to buy a protective put. In fact, you could even buy an equivalent value of an inverse etf in the sector that your position is in.
a collar option strategy, also known as a hedge wrapper, is used to lock in the maximum gain and maximum loss of a stock.