Unit 4 · Level 3 · Portfolio hedging
Collars: protection on a budget
Puts too expensive? Pay for them with upside you were willing to spare: keep the asset, buy a put below, SELL a call above. The call premium funds the put. Tuned right, the whole structure costs nothing upfront ('zero-cost collar'). The real bill is invisible until a rally: everything above the call strike now belongs to someone else.
Free to play. No ads, no token, no account needed to start.
What you get asked
A collar consists of…
Floor bought, ceiling sold. Your outcomes are boxed into a known range, which is exactly the point.
Build a collar, step by step
The covered call you met in Options League 2 plus a protective put, welded into one structure with a self-funding premium.
In a zero-cost collar the call premium fully funds the put, so the real payment is your surrendered ___.
'Zero-cost' names the cash flow, not the economics. You always pay for protection. Here, it's in forgone rally.
Who is the classic collar customer?
Lock-ups, taxes or control can make selling impossible while the downside stays terrifying. The collar converts an unsellable position into a bounded one.
The stock rockets 40% above your sold call's strike. What happens?
The call buyer takes everything above the strike. That WAS the price of your floor. If watching a capped rally would wreck you emotionally, size the collar accordingly. 🐜
The rest of this unit
Puts, collars and tail hedges: what protection really costs, and when it's worth it.