The Collar Options Strategy Explained in Simple Terms
What Is a Collar?
A collar, also known as a hedge wrapper or risk-reversal, is an options strategy used to protect against significant losses but also limits your potential profits. It’s used when you’re optimistic about a stock you own long-term but worry about short-term volatility in the market.
An investor who already owns an underlying a stock (or other asset) creates a collar by buying an out-of-the-money put option, which protects against the stock price going down. At the same time, the investor writes an out-of-the-money call option, where the current price is lower than the option’s strike price. This produces income from selling the call option, which hopefully at least covers the cost of buying the put option. It…
