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Collar: Zero-Cost (or Near-Zero) Downside Protection

The institutional hedge of choice for concentrated long stock. Trade away ceiling for floor — the math often works out free.

OptionsDeck Research 2 min readUpdated May 15, 2026

The collar is the cleanest no-cost hedge on a long stock position. Used by pension funds, family offices, and executives with concentrated single-stock holdings to lock in gains around catalysts without paying upfront for insurance.

The structure

  • Long 100 shares of stock
  • Buy 1 OTM put — the FLOOR (downside is capped here)
  • Sell 1 OTM call — the CEILING (upside is capped here)
  • Net cost = put premium − call premium (often $0 or a small credit)
  • Same expiration for both options — typically 30-90 DTE

The zero-cost collar setup

Find equidistant OTM strikes where put bid + call bid roughly net to zero. Concrete example on a $500 stock with 1.5% IV:

  • Long 100 shares at $500
  • Buy 1 $490 put (5% OTM) for $5
  • Sell 1 $510 call (5% OTM) for $5
  • Net cost: $0
  • Floor: $490 · Ceiling: $510 · Profit between: same as stock

Your downside is capped at $10/share loss (from $500 to $490). Your upside is capped at $10/share gain (from $500 to $510). For zero net premium, you've turned a stock position into a bounded one for 30-60 days.

Where OptionsDeck helps

Use the vol surface to check the put-call skew before placing — when puts are skewed expensive (common during fear), you'd need a tighter call strike for zero-cost, which lowers your ceiling. Build the exact 3-leg structure in the strategy builder and use the scenario analyzer to model the floor + ceiling under different spot + IV shocks.

Compare to the simpler protective put if you want full upside retained for a premium cost.

Frequently asked questions

What is a collar?

Three positions on the same underlying: long 100 shares + long 1 OTM put (the floor) + short 1 OTM call (the ceiling). The call premium offsets the put premium. If chosen well, the trade is net-zero cost or even a small credit.

What's the trade-off?

You give up upside above the short call strike in exchange for downside protection below the long put strike. If the stock rips through the call, you're called away at the ceiling — capping your gain. The closer you set the call strike to spot, the more credit you collect but the lower your ceiling.

What's a 'zero-cost collar'?

A collar where the call premium received equals the put premium paid. You get downside protection for $0 net cost. The asymmetry comes from picking equidistant OTM strikes — say a $5 OTM put and a $5 OTM call. Usually achievable if the put-call skew is reasonable.

Collar vs protective put — which is better?

Protective put = pay premium, keep all upside. Collar = pay near-zero premium, cap upside. Use the collar when you'd be content selling at the call strike anyway (e.g., you've made a strong gain and would be OK exiting near your target). Use the bare put when you genuinely want unlimited upside.

When does a collar break down?

Two ways. (1) Stock gaps above your short call — you're either called away or have to roll the call up-and-out for a debit, eating into the trade's economics. (2) Stock chops sideways with neither leg testing — both expire worthless, you got 'free' insurance, but the trade did nothing for you.

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