The protective collar strategy provides downside protection through the use of index put options but finances the purchase of the puts through the sale of short index call options, in effect trading away some upside potential. By simultaneously purchasing put options and selling call options with differing strike prices and the same expiration the strike of the put is lower than that of the call , a collar often can be established for little or no out-of-pocket cost.

The index puts place a "safety net" under a diversified portfolio by protecting value in a declining market, "insurance" against the risk of a decline. The index call sale generates income to offset the purchase of the protective puts.

How a Protective Collar Works | Investopedia

It is important to note that, depending on the call strike price and the level of the index at expiration, assignment of the short call position may have the effect of limiting portfolio gains.

Since fractional contracts cannot be purchased, assume the fund implements the SPX collar by selling 1, call options and purchasing 1, put options.

Collar Options Strategy | Collar Options - The Options Playbook

To establish the collar, the fund manager might select an SPX put contract with a strike price approximately 7 percent below the current aggregate SPX value. Next, the fund manager may choose to select a call contract currently quoted at a price sufficient to pay for the put purchase. Above the index level, losses from the short call position offset gains in the underlying portfolio.

The puts expire worthless. Below the index level, gains from the long put position offset losses in the underlying portfolio.

The calls expire worthless. TradeStation Voted Best for Options Traders 2 Years in a Row by Barron's. Options involve risk and are not suitable for all investors.

Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options ODD. Copies of the ODD are available from your broker or from The Options Clearing Corporation, One North Wacker Drive, Suite , Chicago, Illinois The information on this website is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current.

Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in the website information.

What Is a Protective Collar? -- The Motley Fool

No statement within the website should be construed as a recommendation to buy or sell a security or to provide investment advice. The inclusion of non-CBOE advertisements on the website should not be construed as an endorsement or an indication of the value of any product, service, or website.

The Terms and Conditions govern use of this website and use of this website will be deemed acceptance of those Terms and Conditions.

My Account Account Settings Sign Out. CBOE Links Government Relations Investor Relations CBOE Livevol Data Shop Livevol CBOE Media Hub System Status Chinese Language Site Risk Management Conference Careers Advertise with CBOE CBOE.

Other CBOE Sites CBOE Futures Exchange C2 Exchange Trading Permit Holders. CBOE Options involve risk and are not suitable for all investors.