Holding stock, buying a protective put, and selling a covered call, so the call premium pays for some or all of the put.
A collar brackets the stock between the put strike (floor) and the call strike (ceiling). A zero-cost collar chooses strikes so the premiums cancel. You give up upside beyond the call in exchange for free downside protection below the put.
Collars are common for concentrated positions that cannot be sold for tax or lockup reasons.
Example: stock at $100. Buy the $90 put for $2.50, sell the $112 call for $2.50. Net cost zero. Over the period your outcome is capped between $90 and $112.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.
Educational only, not advice. Spotted an error? Post in Site Feedback.