Collar strategy
Also: collar strategy, equity collar, protective collar, zero-cost collar
An options strategy that combines a long put (downside protection) with a short call (capping upside) on a concentrated stock position, often structured at zero net cost.
A collar buys a protective put and sells a call on the same underlying stock with similar expirations. The put establishes a floor below which losses are capped; the call establishes a ceiling above which upside is forfeited. A zero-cost collar chooses strikes so that the call premium equals the put premium, producing no net debit. Collars are especially useful for post-IPO concentrated positions where the investor wants to hold for long-term capital gain treatment while limiting drawdown risk in the 12-month holding window.
Example: an employee holds 10,000 post-IPO shares at $96 and cannot sell for 11 months due to tax-treatment goals. She buys a $85 put and sells a $112 call, both expiring in 12 months, for zero net cost. Her position now has a $85 floor (minimum $850,000 value) and a $112 ceiling (maximum $1.12 million value).
Common mistake: constructing a collar that is too narrow, effectively mimicking a sale. IRC Section 1259 constructive sale rules require meaningful market exposure to remain. A collar with a $92 put and $100 call might be recharacterized.
Collar strategies matter at IPO lockup expiration, pre-IPO hedging via OTC variants, and at concentrated positions where the QSBS or long-term holding clock has not yet completed.