Protective put vs collar: pay for the floor, or sell your upside to fund it?
Both trades put a floor under 100 shares. A protective put pays for it in cash and leaves the upside open. A collar sells a call to pay for most of the put, so the floor is cheap and the rally is capped.
The short answer
Pick a Protective put when you think the stock can still run and you only want to insure the drop. You pay the full put price, and every dollar of a rally stays yours.
Pick a Collar when you mainly want to protect what you have and you'd accept a cap. You buy the same put, then sell a call above the stock to pay for most of it. The floor gets cheap. The price is the rally above the call strike.
In a drop, both floors hold and the results are close. In a big rally, they split wide apart. That rally is the whole decision.
Side by side
| Protective put | Collar | |
|---|---|---|
| Legs | 100 shares + 1 long put | 100 shares + 1 long put + 1 short call |
| Cost up front | The full put price | Put price minus call price |
| Floor | Put strike | Put strike |
| Upside | Open | Capped at the call strike |
| Shares can be called away | No | Yes, above the call strike |
| Best case | A big rally | Stock finishes at the call strike |
| Worst case | Drop to the put strike, plus the put cost | Drop to the put strike, plus the net cost |
| Options approval | Low level | Low level (the call is covered) |
A worked example (hypothetical)
You own 100 shares of Larkspur Tools, a made-up stock, at $50. Both hedges run 90 days.
- Protective put: buy the $45 put for $1.50. Cost: $150.
- Collar: buy the same $45 put for $1.50 and sell the $55 call for $1.00. Net cost: $0.50, or $50.
The math, per share:
- Put: max loss = $50 − $45 + $1.50 = $6.50, so −$650. Break-even = $50 + $1.50 = $51.50. Max gain: no limit.
- Collar: max loss = $50 − $45 + $0.50 = $5.50, so −$550. Max gain = $55 − $50 − $0.50 = $4.50, so +$450. Break-even = $50.50.
| Larkspur at expiry | Protective put | Collar |
|---|---|---|
| $35 | −$650 | −$550 |
| $45 | −$650 | −$550 |
| $50 | −$150 | −$50 |
| $55 | +$350 | +$450 |
| $65 | +$1,350 | +$450 |
Check the $35 row the long way. Shares lose $1,500. The $45 put is worth $10, so +$1,000. Put holder: −$1,500 + $1,000 − $150 = −$650. Collar: the call expires, so −$1,500 + $1,000 − $50 = −$550.
The drop: both floors hold
At $35 or $45, both trades lose the same $500 on the shares above the floor. The only gap is what you paid for the hedge. The collar is $100 better because the call paid most of the put.
That is the collar's pitch, and it is true. In the months the stock falls or drifts, the collar loses less.
The rally: the collar gives it back
Now Larkspur jumps to $65 on a buyout rumour.
The put holder lets the put expire and keeps the whole run: +$1,350.
The collar holder's $55 call is $10 in the money. The shares get called away at $55, or you buy the call back for about $1,000. Either way you stop at +$450. You gave up $900 of rally to save $100 on the put.
That is the real price of a cheap floor. It doesn't show up on the order ticket. It shows up on the best day you have all year.
The tax line to check first
In the US, some hedges on shares you already hold can change how the shares are taxed. A collar with the put and call very close to the share price can look a lot like selling the stock (a "constructive sale"), and buying a put can affect the holding period on shares held a year or less. The exact rules are in IRS Publication 550. Check the current edition, or ask a tax pro, before you collar shares with a large gain.
In Canada, a long put plus a covered call on shares you own is widely allowed in a TFSA or RRSP, but options permissions differ by broker.
Pick a put if… pick a collar if…
| Pick a protective put if… | Pick a collar if… |
|---|---|
| You think the stock can still run | You'd be fine selling at the call strike |
| You want to keep the shares no matter what | You mainly want to lock in what you have |
| The hedge is short, like one earnings report | You'll hedge for months and the cost adds up |
| You can afford the full premium | You want the floor for little or no cash |
Want an even cheaper floor? A put spread collar sells a second, lower put, and its protection stops. For a collar priced to cost nothing, see the zero-cost collar. You can test your own strikes with the collar calculator, and compare every hedge side by side in the options strategy comparison chart. If you sell calls on shares already, the wheel strategy is the cousin of the collar without the put.
Questions
Is a collar just a covered call plus a put?
Yes. You own 100 shares, sell a covered call and buy a put. The call pays for some or all of the put.
Which loses less if the stock crashes?
Usually the collar, by about the call's premium. Both have the same floor at the put strike. The collar paid less for it.
What happens to a collar if the stock rallies past the call strike?
Your shares can be called away at the call strike. You keep the gain up to that strike and give up everything above it.
Can I remove the call later?
Yes. You can buy the call back at any time before expiry. If the stock has risen, that buyback will cost more than you sold it for.
The Options Wheel System · for StructureX members
Learn the whole wheel, step by step. Use it for life.
44 plain-English modules take you from zero to running the wheel: covered calls, cash-secured puts, assignment, rolling, the math and the risk rules. A scored quiz after every part. Members of StructureX Foundations, my 50-lesson course, add it in one click, with the AI Research Desk.
See What’s Inside the Course $34.99 a month · Cancel anytimeFollow along