What Is a Collar in Stocks? The Stock Strategy That Caps Risk and Locks In Gains
Collars limit both your upside and downside—making them a go-to move for investors who want protection without pulling out.
What Is a Collar in Stocks?
A Risk Strategy Hiding in Plain Sight
Ever wish you could lock in your gains and protect yourself from the downside?
Good news:
You can.
It’s called a collar.
What’s a Collar?
Simple definition:
A collar is an options strategy that limits both your upside and your downside.
Translation?
It’s like putting a seatbelt and a speed limiter on your stock.
Here’s how it works:
- You own a stock (let’s say it’s already gone up and you want to protect those gains).
- You buy a put option — this gives you the right to sell the stock at a set price. Think: downside protection.
- You sell a call option — this obligates you to sell the stock if it rises past a certain price. Think: capping your upside.
That combo — long stock, long put, short call — is your collar.
Why Should You Care?
Because markets don’t move in straight lines.
Because profits can vanish overnight.
Because emotions kill returns.
A collar keeps you cool.
Protected on the downside.
Disciplined on the upside.
Real-World Example
Let’s say you own 100 shares of Apple at $160.
You’re up big. But worried about a pullback.
So you set up a collar:
- Buy a $155 put (insurance if Apple drops below $155).
- Sell a $170 call (you give up gains above $170).
- The put costs money.
- The call brings in money.
Often, the cost of the put is offset by the call premium.
Net cost? Close to zero.
Risk? Limited.
Upside? Still there — just capped.
What It Means
You’re not gambling anymore.
You’re managing risk.
You’ve locked in a profit range.
No panic selling.
No sleepless nights.
It’s the move pros make when they want to defend gains without exiting a position.
When to Use It
✅ You’ve got a solid gain
✅ You want to stay in the game
✅ But you’re nervous about a downturn
Or…
✅ You’re managing a portfolio and need predictable guardrails
✅ You’re nearing retirement and can’t stomach a hit
Bottom line?
If you want to stay invested but sleep better — collars deliver.
Final Thought
You worked hard to earn those gains.
Don’t let the market snatch them back.
Collars won’t make you rich overnight.
But they will make you a smarter investor.
And sometimes?
That’s worth even more.