Options Directional / Hedging
Collar
Own the stock, buy a put below it, sell a call above it. The call premium helps fund the put, sometimes fully. Both the crash and the rally get capped in the process.
Drag the strikes, watch the scale
The put strike (left handle) sets the floor. The call strike (right handle) sets the ceiling, and its premium is what pays for that floor. Drag either one and the scale below tips toward whichever side is collecting more money.
Drag the two gold circles · left = protective put strike · right = covered call strike
How it works
- Three pieces, one position: shares, a long put, a short call. The put is the insurance. The call is what pays for it, or most of it. Together they turn open-ended stock ownership into a defined range.
- Below the put strike, the loss stops growing. No matter how far the stock falls, the position is worth the put strike, minus whatever net debit was paid to set the whole thing up (or plus the net credit, if the call brought in more than the put cost).
- Above the call strike, the gain stops growing too. That's the tradeoff for cheap or free insurance. Once the stock passes the call strike, the shares effectively get called away at that price, and every dollar of further upside belongs to whoever bought the call.
- A zero-cost collar is a specific, narrow target, not the default. Drag both strikes until the call premium collected roughly equals the put premium paid and the badge above flips to "zero-cost." It's not automatic, moving either strike even slightly can tip it into a net debit or a net credit.
Where this breaks
Giving up a real rally to hedge a crash that didn't come
Drag the call strike in close to the current price to collect more premium and cheapen the put. The ceiling comes down with it. If the stock takes off, the position simply stops participating past that strike, and the shares effectively got sold at a price the visitor picked weeks or months earlier. A collar isn't free protection, it's protection traded for a hard cap on the upside, and the cap is usually tightest exactly when the cost savings look best.