Collar (options hedge)
A collar protects a long position in an underlying by buying an out-of-the-money put and financing it by selling an out-of-the-money call. The result is a band of outcomes: losses below the put strike and gains above the call strike are cut off, often for little or no net premium.
Senzoukria · Glossary · Updated September 2026
At a glance
- Construction
- Long underlying + long OTM put + short OTM call
- Outcome
- P&L bounded between the two strikes
- Cost
- Put premium − call premium, often near zero
Worked example
An investor holds 100 shares at 100. With 30 days, 20% implied volatility and zero rates, the 95 put costs 0.57 and the 105 call brings in 0.64, a net credit of 0.08. Whatever happens by expiry, the position is worth between 95 and 105 per share plus the credit: the P&L is bounded between −4.92 and +5.08 per share. In equity index markets the put skew usually makes the equidistant put more expensive than the call, so a zero-cost collar often needs a call strike closer to the money than the put.
| Price at expiry | Stock P&L | Options P&L | Total per share |
|---|---|---|---|
| 85 | −15.00 | +10.08 | −4.92 |
| 100 | 0.00 | +0.08 | +0.08 |
| 115 | +15.00 | −9.92 | +5.08 |
Why collars matter to index traders
- A collar is long a put and short a call: the investor sells upside volatility to buy downside protection, which is one source of the put skew in index options.
- The dealer on the other side of client collars ends up long calls and short puts, the pattern assumed by the most common gamma exposure convention.
- Some funds run collar programmes on index options that are rebalanced on a fixed schedule, so the strikes they hold can become large open interest concentrations; their exact positions are not published.
- When a collar is rolled, the old strikes' open interest disappears and new strikes appear, which can move modelled walls without any change in market views.
Limits
A collar gives up the upside beyond the call strike, which is an opportunity cost in strong rallies. On American-style options the short call can be assigned early, delivering the shares. The protection lasts only until expiry, and rolling it at a new implied volatility changes the band. For a futures trader, the equivalent structure uses options on futures around a long futures position.
In Senzoukria
Senzoukria does not identify collars. Its GEX module sums open interest by strike under a stated dealer-positioning convention, counting calls with a positive sign and puts with a negative one by default, a pattern consistent with dealers facing client collars and overwriting, and its Calculation assumptions panel lets you reverse that convention to see how the key levels change.
Related
In the same section
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- MDP 3.0
- Composite profile
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Frequently asked questions
- Is a zero-cost collar free?
- It requires no net premium, but it is not free: the investor gives up gains above the call strike. The cost is paid in foregone upside rather than in cash.
- How does a collar affect gamma exposure?
- From the dealer's side, facing a client collar means being long the client's sold call and short the client's bought put. Under a delta-hedging assumption, that is long gamma at the call strike and short gamma at the put strike, which is how the usual GEX convention treats calls and puts.