A collar is an options strategy that involves buying or owning a stock, while simultaneously purchasing a protective put option and selling a covered call option. This strategy is used to limit the downside risk of owning the stock while also generating income from the sale of the covered call.

For example, let’s say you own 100 shares of Company XYZ, which is currently trading at $50 per share. You could implement a collar strategy by purchasing a put option with a strike price of $45, which would protect against any losses below this price, and simultaneously selling a call option with a strike price of $55, which would generate income from the premium received for selling the option. The put option and the call option effectively create a “collar” around the stock, limiting the potential gains and losses. This strategy is often used by investors who are bullish on a stock but want to limit their downside risk in case of unexpected market events.