Understand the position
Hold 100 shares purchased at $100. Buy a $95 put for $2 and sell a $105 call for $2 with the same expiration and deliverable. The option premiums offset in this fictional example. Real collars can require a net debit or produce a net credit.
With zero net option premium, the whole-position expiration range is a $500 loss to a $500 profit before costs. The put defines the lower boundary; the call creates the upper boundary. The stock purchase still requires $10,000.
Read the payoff and try a scenario
Collar: profit and loss at expiration
- Buy 100 shares at $100; buy a $95 put for $2 and sell a $105 call for $2.
- Expiration break-even stock price: $100 before costs.
- The plot displays $70–$130 only. Move the control to $0 to examine a stock collapse; the right edge is not an upside bound.
Read the chart data
| Stock price at expiration · USD | Whole position P/L (Net P/L · USD per share) |
|---|---|
| 70 | -5 |
| 80 | -5 |
| 90 | -5 |
| 95 | -5 |
| 100 | 0 |
| 105 | 5 |
| 110 | 5 |
| 120 | 5 |
| 130 | 5 |
One contract per option leg; 100 shares where the strategy includes stock. Read the fixed position above before changing the price.
At stock $80, the $2,000 stock loss is offset by $1,500 of put intrinsic value: net −$500. At stock $120, the stock gain is reduced by the short call’s $1,500 intrinsic obligation: net +$500. Between $95 and $105, the position follows the stock.
Separate expiration economics from live prices
The diagram calculates net profit or loss at expiration with the specified position intact. Before that date, remaining time, implied volatility, rates, dividends and bid–ask spreads affect each leg’s market value. A break-even shown here is an expiration break-even, not the price at which an early closing trade must be profitable.
For an actual position, calculate net execution costs and contract quantities, and verify every leg’s expiration, underlying and deliverable. The examples use one standard 100-share contract per leg. Adjusted contracts can differ; an incomplete or mismatched hedge changes the risk.
Understand the tradeoffs and obligations
A zero-premium collar is not costless in an economic sense: it gives up upside, incurs trading costs and can have tax consequences. The equal premium assumption is illustrative, not a quote that must be available.
Early call assignment may sell the stock before the intended horizon. If one option leg is closed, expires or is adjusted differently, the payoff changes. Keep both deliverables, quantities and expiration procedures aligned with the shares.
Is this zero-net-premium collar free protection without a tradeoff?
Show the explanation
No. It sacrifices gains above the call strike and still incurs costs and operational obligations. Its net premium is zero only in the stated example.
Sources and editorial notes
Original explanations and hypothetical examples prepared with AI assistance. Primary reference check dates are listed below. Numerical examples are hypothetical unless explicitly identified otherwise.
- OCC / OIC: Collar
Position construction and risk tradeoffs. All premiums, strikes, payoff graphics, practice questions and calculations are original fictional examples, not copied charts or performance results. Checked October 17, 2026.
- FINRA / OCC: Understanding Assignment
Exercise, assignment, after-hours risk and broker cutoff considerations. Strategy diagrams assume intact matching positions through settlement. Checked October 17, 2026.