What is a Collar Option?

Collar Option refers to a protective strategy in options which is used after a long position has made substantial gains. It is a general check on market activities like a circuit breaker. A collar position is usually created by an investor after he/she buys an out-of-the-money put option and at the same time writes an out-of-the-money call option. It is also known as a hedge wrapper. The amount of risk and reward is limited in this and the broader outlook for the underlying security is neutral.

It is basically similar to Covered Call Strategy with the relaxation of a Protective Put. Latter acts as a safeguard from unwarranted losses which can happen due to unexpected fall in prices of the underlying.