Collar strategies

The steps below are the order the trade is actually placed in, and the order matters: what has to be in the account before an option can be sold is what makes the obligation coverable. None of the steps mentions a price, because there is no options-chain feed behind this site — nothing on this page is a quote, and no premium named anywhere here is one that exists in the market today.

1. Start from shares you already own — a collar is a wrapper around a holding, not a standalone trade.
2. Sell a call above the current price. That caps the upside and pays you a premium.
3. Buy a put below the current price with the same expiration. That sets a floor and costs you a premium.
4. The net of the two is the cash flow. Strikes are often chosen so the call pays for the put, which is where the phrase zero-cost collar comes from.
5. At expiration: above the call strike the shares are called away; below the put strike the put protects; in between, both expire and the shares are simply still yours.

Every line below is a rule of how the contract works, not a forecast and not a price. None of it moves when the market moves.

What pays you

The net premium — the call premium minus the cost of the put. It can be a credit, roughly zero, or a debit. A collar is bought for the floor far more often than for the income.

Best case

Capped at the call strike, adjusted by the net premium.

Worst case

Floored at the put strike, adjusted by the net premium — which is the entire point of the structure. The floor is what the put costs you to have.

Breakeven

Share cost basis adjusted by the net premium paid or received.

Capital required

100 shares per contract, plus any net debit if the put costs more than the call pays. Requires approval to buy puts as well as to write covered calls.

Broker approval

Covered call writing plus long put buying; typically level 1-2.

Assignment

The short call can be assigned early, especially around an ex-dividend date, which removes the shares and leaves you holding a long put against stock you no longer own. The long put is yours to exercise or sell whenever you choose.

Why tax gets its own box here rather than a line at the end. Premium is not taxed the way a dividend is, the treatment can change depending on whether the contract expires, is bought back or is assigned, and being assigned turns an option trade into a share sale or a share purchase with its own consequences. The note below is the general US structure, not advice, and not a substitute for asking someone about your own return.

This is the half of the trade that arrives later. The premium is collected once, at the start, and it is the whole of what this position can pay. The obligation behind it runs for the entire life of the contract, and the list below is what that obligation costs when the market moves through it rather than around it.

Full explainer in the Learn library: Collar strategies. Run your own numbers with the covered-call yield calculator.