An option collar is a combination option strategy that involves 3 distinct legs:

  • Long shares of stock
  • Short a call (usually out of the money)
  • Long a protective put (usually at the money or out of the money)

For more info on stock option collars, check out:



The strike prices of the covered call portion and protective put portions of the collar are a matter of personal preference and individual risk tolerance.  For greater downside protection, an at the money protective put would be purchased, but this comes at a higher cost than the out of the money protective put.  The covered call strike price is also subjective; the higher the strike, the greater the potential reward.  But since the protective put is partially financed by the selling of the covered call, a lower strike covered call would have the benefit of covering a larger perecentage of the purchase price of the protective put.

What about the option collar duration.  Many stock option books present the case of stock option collars as a longer term hands off investments involving long term LEAP options (January expiration 1 or 2 years out).   But there are also advantages to using shorter term options as part of a collar trade.  If a stock moves up quickly toward the strike price of the covered call then a shorter duration collar would realize the maximum profit faster than a longer term collar.  As a demonstration, consider the following example:  (download support file here)

  • Purchase 100 shares of stock at a price of $100 each – $10,000 total
  • Purchase 1 protective put at a 90 strike
  • Sell 1 covered call at a 110 strike
  • Compare a 30 day duration with a 60 day duration option collar

option-collar-length-1

option-collar-length-2

The three sections of the images above are:

  • TOP – Initial assumptions of the collar
  • MIDDLE – calculations using a 30 day collar, with maximum profit realized after 30 days.
  • BOTTOM – calculations using a 60 day collar, with 30 days left before expiration of collar legs.

With a 30 day collar, the maximum profit of $1,027 can be reached after 30 days (collar expiration) when the stock price reaches the strike price of the covered call.

However, 30 days after initiating a 60 day collar, the same stock price movement up towards the covered call strike yields a lower profit of only $591.  This lowered profit is mainly due to the loss in the covered call from having another 30 days left until expiration.

The disadvantage to a shorter term option collar is the limited time horizon to make adjustments in the event of a sharp decline in share prices.   For this reason, I personally prefer to have shorter term collars extended at least 30 days past earnings releases.  If the shares decline sharply after earnings, profits in the protective put and covered call can partially offset the loss from the share price decline.   And shorter term collars can always be rolled out for more time and adjusted with new strikes on both sides of the new stock price.

When deciding on the length of your own option collars, you should consider the following:

  • What is your upward price target and how quickly do you expect it to get there
  • Whether you want a long term hands off trading vehicle, or a more active adjustment vehicle

Disclaimer:  Options can be dangerous.  Trade at your own risk!