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Covered call vs collar: is the protection worth what it costs?

A collar is a covered call plus a protective put. The put sets a floor under your shares, and most of the call premium pays for it. You trade most of your premium for a known worst case.

Options guide · 8-minute read · Updated 2026-10-26

The short answer

A Covered call gives you a premium and caps your upside, but leaves almost all of the downside. A Collar adds one more piece: you buy a put below the price. That put lets you sell your shares at its strike, however far the stock falls.

So the collar has a ceiling (the call) and a floor (the put). The cost is that the put eats most, sometimes all, of the call premium. In a calm month, a collar keeps much less than a plain covered call. In a crash, it loses far less.

What each one holds

A worked example (an illustration, not a trade idea)

You own 100 shares of a made-up stock, XYZ, bought at $50. It trades at $50 today.

Covered call: sell a 60-day $55 call for $1.50. You collect $150.

Collar: sell the same $55 call for $1.50, and buy a 60-day $45 put for $1.20. The put costs $120. Net, you collect $30.

Every outcome at expiry:

Now read the middle rows. Between about $45 and $55, the collar does worse every time. At $45 it loses $470 while the covered call loses $350. At $50 it keeps $30 while the covered call keeps $150. That gap is the price of the floor.

What the put really costs

The put's price depends on three things:

1. How close it is to the price. A $48 put protects more and costs more than a $45 put.
2. How long it lasts. A longer put costs more, but often less per day.
3. Implied volatility. When the market is nervous, puts are expensive. That's usually when people want them most.

A "zero-cost collar" picks strikes so the call premium pays for the whole put. It sounds free. It isn't: you've given up all the premium, and your upside is still capped.

Some sellers move the call closer to the price to pay for a better put. That collects more, but caps the shares sooner. Every version is the same trade-off with different numbers.

When a collar makes sense

A collar is not part of plain the wheel strategy, which leaves the downside open and manages it with size. But it can fit some moments:

• You have a big gain you don't want to give back and can't sell yet, for tax or other reasons.
• A known risk is coming, such as earnings, and you want a floor for a few weeks.
• The position is bigger than you'd like, and you need a limit on the loss while you reduce it.

It usually doesn't fit when the premium is the reason you're in the trade. If the put eats it all, the covered call's purpose is gone.

The details that catch people

• Three moving parts. Shares, a short call and a long put. Each has its own expiry and its own bid-ask spread. Use limit orders on each leg, or a single collar order if your broker offers one.
• The put expires. Protection lasts only until the put's expiry. After that you're a covered call seller again, or you buy a new put.
• Early assignment still applies. The short call can be assigned early, especially before an Ex-dividend date. If that happens, you're left holding a lone put. Sell it or keep it, but decide on purpose. See I forgot the ex-dividend date.
• Taxes can change. In some places, a tight collar can affect how a long-held gain is taxed. This is general information, not tax advice; check with a tax professional or your broker.

In Canada, buying puts in a TFSA or RRSP is allowed at many brokers, but not all of them allow every combination. Covered calls are widely allowed; options permissions differ by broker, so check yours.

Which one fits you. Choose the covered call when you're happy to hold the shares through a fall and want to keep the full premium.

Choose the collar when the worst case matters more to you than the premium, for a specific stretch of time.

Either way, write down the worst case before you open the trade. On a covered call it's almost the share price. On a collar it's the gap down to your put, plus what the put cost, minus the call premium you took in.

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