Collar
Prerequisite strategies: trade a long put and a covered call separately, through one expiry each, before combining them here. The collar is the Level 1 capstone: two legs you know, wrapped around shares you already own.
Why this structure exists
A collar solves one problem: a holding too big to be comfortable and too expensive to sell. Selling crystallises the whole gain in one tax year at 18% or 24% above the £3,000 annual exempt amount; holding on leaves you exposed to a 40% drawdown in a single name. The collar fixes a worst case in pounds, keeps the shares and defers the disposal.
The nearest simpler alternative is a protective put alone: identical floor, no cap. Why not just do that? Because it costs cash every quarter — roughly 3–4% of the position for a three-month put slightly out of the money, 12–16% a year on a holding you expect to rise. Almost nobody keeps paying it. The collar sells a call to cover that bill, so the cover is paid for in upside rather than cash. If you would sell at the call strike anyway, a covered call alone is simpler. If you would sell today, sell today: a collar buys time for a decision, it does not replace one.
Construction
One collar, one expiry, three components
| Leg | Buy / sell | Quantity | Strike rule | Expiry rule | Target delta | Worked-example price |
|---|---|---|---|---|---|---|
| Underlying shares | Held | 1,000 (one ICE UK contract) | n/a | n/a | +1.00 | 1,400p = £14,000 |
| Protective put | Buy | 1 contract | The price you cannot afford to see; 5–10% below spot | 60–120 days, past the event hedged | −0.20 to −0.30 | 1,300p put at 50p = −£500 |
| Covered call | Sell | 1 contract | High enough that net debit is ≤1% of the position | Same expiry as the put | +0.20 to +0.30 | 1,550p call at 38p = +£380 |
| NET | Net debit | 1 collar = 1,000 shares | Floor 1,300p, ceiling 1,550p | 91 days | +0.45 to +0.55 | −£120 premium, −£2.80 costs |
Three constraints are hard. Shares held ≥ contract size × calls sold, or the call is uncovered and you hold a Level 3 position in a Level 1 account. Put strike < spot < call strike. And net debit ≤ 1% of position value per quarter; if a zero-cost structure forces the call inside +6% of spot, you are paid too little for the cap.
Risk box
Per 1,000-share contract: max loss = (spot − put strike + net cost) × 1,000; max profit = (call strike − spot − net cost) × 1,000; breakeven = spot + net cost. Capital is the shares you own plus £122.80 cash. Nothing is borrowed and no buying power is reduced — which is what makes a three-component structure a Level 1 one.
Entry criteria
| Criterion | Rule | Why it is the rule |
|---|---|---|
| Implied volatility | No hard IV rank gate — you buy one option and sell another. Judge the net, not the level: reject if the zero-cost call sits inside +6% of spot. | Skew makes the put dearer than the equidistant call, so high IV widens the cap you must accept. |
| DTE window | 60–120 days, one expiry beyond the event hedged (lock-up, results, 5 April). | Under 30 days you buy the same floor four times a year and pay four sets of spreads. |
| Strike selection | Put at −0.20 to −0.30 delta, then raise the call strike until net debit is ≤1% of the position. | The put strike is a personal number: where you would be forced to act anyway. |
| Liquidity screen | Two-sided quote, bid-ask ≤10% of mid, open interest in the series. Limit at mid, never market. | ICE UK series are far thinner than US chains. The spread is the real fee. |
| Underlying | Only shares you own, in whole multiples of the contract size, in the same account as the options. | A call written against shares held elsewhere is not covered. |
| Event calendar | Expiry after the event. Check every ex-dividend date in the window against the short call. | An ITM call with less extrinsic value than the dividend should be assumed assigned the night before. |
Do not enter if:
- You own fewer shares than one contract covers — that is an uncovered call.
- You would sell on a 10% fall anyway. Then sell; a collar costs money to defer a decision already made.
- The net debit exceeds 1% of the position for 90 days of cover.
- The put strike sits above the price you actually care about.
- The shares are in a stocks and shares ISA. Options are not qualifying investments and no broker can work around it.
Greeks at entry and how they evolve
| Greek | At entry | 50% of DTE, price flat | 7 DTE | After +1 SD | After −1 SD |
|---|---|---|---|---|---|
| Delta | +0.47 a share (about 470 shares of exposure from 1,000 owned) | +0.55, drifting up | +0.85 if still mid-range | +0.25, falling to zero | +0.20, falling to zero |
| Gamma | Near zero — the legs cancel | Near zero | Strongly positive near 1,300p, negative near 1,550p | Negative: short call dominates | Positive: long put dominates |
| Theta | Slightly negative — 12.28p of net cost decays | Slightly negative | Near zero away from a strike, sharp at one | Positive: the short call is the bigger extrinsic number | More negative: an ITM put with extrinsic left to lose |
| Vega | Slightly positive — the put carries more vega than the call | Slightly positive | Near zero | Negative | Positive |
Delta decides this trade, and it is not constant. You own 1,000 shares but behave like the owner of about 470, and that number falls at both ends: near the call strike the short call cancels your upside, near the put strike the long put cancels your downside. The position's character flips the day the short call goes in the money — until then you are a shareholder with insurance, after that a seller waiting for a settlement date.
1,000 Rolls-Royce shares, bought at 350p, now 1,400p
Rolls-Royce Holdings (RR.) traded around 1,420p in mid-August 2026; this uses a round 1,400p so the arithmetic is checkable. The ICE Futures Europe RR option is rights over 1,000 shares, physically delivered, American style, quoted in pence per share, tick 0.25p = £2.50, last trading day 16:30 London on the third Friday. One contract collars 1,000 shares, not 100 — though from 8 December 2025 ICE also lists newer standard series sized at 100, so read the size off the chain.
You hold 1,000 shares at a s.104 pool cost of 350p plus the 0.5% SDRT paid on purchase: £3,500 + £17.50 = £3,517.50. The holding is worth £14,000, on £10,482.50 of unrealised gain.
Base case — RR at 1,450p. Both options expire worthless. Shares +£500, put −£500, call +£380, costs −£2.80: +£377.20, exactly (1,450 − 1,412.28)p × 1,000. Action: re-collar or stop. Tax: £378.60 gain on the call grant, £501.40 allowable loss on the lapsed put — a net £122.80 loss on a holding that rose £500.
Adverse case — RR at 1,150p. The put is 150p in the money. Sell it rather than exercise it: £1,500 against £500 cost. Shares −£2,500 unrealised, put +£1,000, call +£380, costs −£4.20 with the closing leg: −£1,124.20, the max loss plus that commission. Action: you still hold the shares — re-collar lower or sell. The sting is the tax: £997.20 of gain on the put and £378.60 on the call grant, £1,375.80 of chargeable gains in a quarter you lost money. The £2,500 fall is not an allowable loss, because you have not disposed of the shares.
Favourable case — RR at 1,700p. The call is assigned, 1,000 shares delivered at 1,550p for £15,500. Shares +£1,500, call +£380, put −£500, costs −£2.80: +£1,377.20, the max profit — against £17,000 unhedged, so the cap cost £1,622.80 of paper upside. Tax: s.144(2) merges grant and sale, so proceeds are £15,878.60; gain over the £3,517.50 pool is £12,361.10, less the £501.40 put loss = £11,859.70; less the £3,000 exempt amount, £8,859.70 taxable — £2,126.33 at 24%. Action: buying the holding back costs 0.5% SDRT again, £85 on £17,000.
On a US underlying — the realistic route for most UK readers collaring vested RSUs — the contract is 100 shares and every leg is a dollar transaction. Each disposal converts to sterling at the spot rate on that leg's own date: the call grant when sold, the put lapse at expiry, the share sale on assignment. A dollar collar does not hedge the dollar: a $400 floor is £320 at 1.25 and £286 at 1.40, so sterling strength eats protection that holds perfectly in dollars.
These are three hand-picked scenarios with round premiums, not a typical or expected outcome. Real chains price differently every day, ICE spreads are wider than the mid quoted here, and a collar most often disappoints by capping a share that then doubles. Past performance, including any illustrative example shown here, is not a reliable indicator of future results.
Management and adjustment
At Level 1 you do not adjust. You close, or let it run to expiry. Every adjustment is two more trades, two more spreads and two more tax events.
| Trigger | Diagnosis | Action | Do NOT do this |
|---|---|---|---|
| Share falls through the put strike | The hedge is working | Sell the put and keep the shares, or hold to expiry | Do not exercise a put that still holds extrinsic value — you throw it away and dispose of the shares you were protecting |
| Share rallies through the call strike | You agreed to sell at that price | Accept assignment, or close the call for a debit if you can afford to | Do not roll the call up and out for a net debit to rescue a cap you agreed to |
| Ex-dividend date in the window, call ITM | Early assignment risk, American style | Close the call if its extrinsic value is under the dividend | Do not assume you are left alone until expiry |
| 21 days left, share mid-range | Time value spent, little protection left | Close both legs and re-collar further out, or stop | Do not hold a spent hedge into expiry week for the last 2p |
Roll when you reach the time stop and still want cover: close both legs, open a new collar 60–120 days out. Roll to strikes set around the new share price, not the old one. Do not roll a tested short call for a net debit, or roll a collar out merely to postpone a disposal you have already decided on.
Exit rules
- Profit target: close at 75% of max profit — +£1,032.90. Past that the share is near the cap and you are paid almost nothing to keep it on.
- Stop: no price stop — the put is the stop, fixed at −£1,122.80 the moment you enter. The one mechanical stop is a cost stop: if re-collaring costs over 1% of the position, stop collaring and reduce the holding.
- Time stop: close or re-set at 21 days to expiry regardless of profit and loss. Gamma at both strikes rises sharply in the last three weeks.
- Assignment-avoidance exit: close the short call before any ex-dividend date on which it is in the money, and never leave an ITM leg into the ICE last trading day (16:30 London, third Friday) — these contracts deliver 1,000 real shares.
If all four are silent, do nothing.
Margin and broker reality
A cash account is enough. The put is paid in full and the call is covered by shares in the same account, so there is no initial margin, no maintenance requirement and no uncovered-option permission — only basic options permission on a GIA, obtained through the broker's appropriateness assessment. The cost that bites is structural: at £1.40 a contract on Interactive Brokers' published UK stock-options schedule, commission is trivial next to the ICE spread, where 2p of bid-ask on a 50p put is £20, or 4% of the premium, on every leg you open and close.
shares held ≥ contract size × calls sold, with the size read off that series' contract specification on the day you trade, not remembered from another market.What to trade instead
Simpler, from below: a protective put gives the same floor with no cap, paid for in cash every quarter. A covered call gives premium with no floor — fine if a fall would not force you to act. The collar is the only one of the three that fixes both ends, and it charges you the upside to do it.
More precise, from above: at Level 2 you can cheapen the floor by selling a further-out put against it, but protection then stops below that strike, which defeats the point. Running a collar quarterly as a standing policy is also Level 2 work, because every turn adds grant-date gains and lapse losses to your return.
First-trade checklist
- Paper-trade one complete collar through an expiry before risking money. That is the gate.
- Confirm the shares sit in an options-permissioned GIA. In an ISA, this trade does not exist.
- Read contract size and exercise style off the contract specification, not a tutorial.
- Check you own a whole multiple of that contract size.
- Note the expiry and the last trading day and time.
- Price the put first, at the price you cannot afford to see.
- Price the call second, raising the strike until net debit is at or under 1% of the position.
- Write floor, ceiling, breakeven and max loss in pounds on paper before you click.
- Enter both legs as one order, limit at mid. If it does not fill, improve by one tick (0.25p = £2.50), not five.
- Log both legs the same day: date, underlying, leg, contract size, premium, tax point.
Honest risk statement. A collar reduces risk; it does not remove it. You can lose the full £1,122.80 here, be assigned early and lose shares you wanted to keep, and pay tax on a hedge in a quarter the position lost money. Options are complex instruments and can lose value quickly. This is education, not personal financial, tax or investment advice; figures are illustrative for 2026/27.