What is a Collar?
Buy put + sell call on stocks you own. Call premium finances put protection.
Example: Infosys Collar
- Own 500 shares at ₹1,500
- Buy 1,450 PE at ₹25
- Sell 1,550 CE at ₹30
- Net credit: ₹5
Outcomes:
- Below 1,450: Protected at 1,450
- 1,450-1,550: Unchanged
- Above 1,550: Called away at 1,550
When to Use
- Free/low-cost protection
- Willing to cap upside
- Before major events
What a Collar Does to a Stock Position
A collar wraps an existing long stock holding in two protective option legs: a long put below the current price to cap downside, and a short call above it to finance that protection. The result is a band of defined outcomes where the maximum loss is limited to the difference between the purchase price and the put strike minus any net credit, and the maximum gain is capped at the call strike. The strategy is a favourite of investors who want to protect gains without paying for puts out of pocket.
The elegance of the collar lies in its cost structure. If the put and call strikes are chosen so their premiums are roughly equal, the collar costs little or nothing to establish, with the income from the short call paying for the long put. This makes it attractive in Indian markets for large positions in stocks such as Reliance, HDFC Bank or Infosys that an investor wants to keep for the long term but cannot bear to see give back a large gain.
Choosing the Right Strikes
Strike selection defines the trade-off between protection and upside. A put struck 5 percent below the current price protects deeply but costs more, while a put 10 percent below is cheaper but allows a bigger drawdown. The call strike sets the ceiling: a call 10 percent above the price sells more upside for a higher premium, funding a tighter put. Most conservative collars choose a put slightly below the purchase price and a call comfortably above the current price so the position can still benefit from modest appreciation.
Worked Example on Infosys
Suppose an investor owns Infosys bought at 1,500 and it now trades at 1,700. To lock in gains, buy a put at 1,600 for a premium of 40 and sell a call at 1,850 for a premium of 40, producing a zero-cost collar. Between 1,600 and 1,850 the position behaves like the stock, while below 1,600 the put protects the position at effectively 1,560 after the premium, and above 1,850 the short call hands gains over. The floor locks in roughly the 4 percent gain from 1,500 to 1,560 while the ceiling caps appreciation around 23 percent before the premium.
When the Stock Falls or Rises
If Infosys drops to 1,500, the put gains value to offset the stock's fall and the position holds near the floor. If the stock jumps to 1,950, the short call limits the gain, and the investor keeps the appreciation only up to the call strike. The trade-off is the cost of certainty: downside protection is not free, and in a strong rally the collar feels restrictive because it caps the very upside the investor hoped to capture.
Managing the Collar Over Time
Collars require maintenance because the market moves in favour of or against the position. If the stock rises to the call strike, the investor may roll the short call up to a higher strike to re-open upside, paying a cost. If the stock falls toward the put, the investor may roll the put down to keep protection at a meaningful level. Rolling removes the profits and losses from the original position and re-establishes a new band, so each adjustment must be weighed against new premiums.
Alternatives and Caveats
- Buying a put alone caps downside but costs cash, no upside is lost.
- A protective put is simpler to manage but expensive in high-volatility markets.
- Covered calls alone provide income but no downside protection.
- The collar is best near a perceived market top when volatility is elevated and put prices are lower relative to calls.
When the Collar Fits Your Portfolio
The collar suits investors who have done well and want to stay long but fear a pullback, especially around earnings, budget announcements or global risk-off events. It converts an open-ended stock position into a defined-risk structure for a limited horizon. The strategy is not a permanent holding; it is a tactical shield. Review it at each market juncture and let the expiry of its options force a conscious decision about whether protection is still worth the cap on your upside.
Running a Collar Through the Event Calendar
In the Indian market the collar earns its keep around specific dates rather than as a permanent fixture: a Union budget, an RBI policy decision, or a single-stock results day can gap Reliance, HDFC Bank or Infosys past several strikes in one session. Set the collar's expiry two to three weeks out so protection is live across the event, then review it after the date settles and decide whether the cap on upside is still worth the premium you saved. Keep a written note of the floor and ceiling you locked in, because once the market moves, photos of the original strikes are what stop you from second-guessing a reasoned plan. A collar is a deliberate trade-off, not a guarantee, and treating it that way keeps gains protected without pretending the cap on good news does not exist.
