What is a Collar?
A Collar is an options strategy designed to protect downward fluctuations in the price of owned stock shares. If a trader expects large price drops in the shares they own, they can protect those shares by buying one out of the money put, and selling (or shorting) one out of the money call for every 100 shares owned. As the stock price falls, the value of this position increases as the call contract will lose money, and the put contract will gain money. This sort of position will also drastically limit profit potential on the owned shares, because as the stock price rises, the value of this type of options position will drastically drop. The setup of a Collar is similar to that of a Bearish Risk Reversal.