The collar: a floor under a large UK holding, paid for with the upside

This page assumes the reader has met the long put and the covered call, the two legs a collar puts together. Rolls-Royce appears as a model underlying from the site’s model sheet, not as a view on the company, and the endings below illustrate the mechanics rather than forecast anything.

A collar is three positions: shares already held, a bought put below the price and a written call above it, on the same expiry, one contract of each per 1,000 shares. The put caps the loss until expiry; the call gives up every gain above its strike, and its premium pays for some or all of the put. The most that can be lost is the fall to the put strike plus any net cost. It is built for the owner of a large, low-cost holding who wants a fixed worst case for a few months without selling, and so without realising the gain, and who accepts a ceiling on the upside in exchange.

The position: Rolls-Royce shares, a 1,300 put and a 1,550 call

Model inputs. Wednesday 8 July 2026: Rolls-Royce (RR) at 1,400p, a model level (RR closed at 1,399.4p that day, price data Yahoo Finance). The example is dated before the site’s 17 August model date because RR traded near 1,400p only in June and July; it closed at 1,563.8p on 17 August. One ICE standard RR put, strike 1,300p, and one call, strike 1,550p, both expiring Friday 16 October 2026 (100 days). Implied volatility 35.6% at 1,300p and 31.1% at 1,550p, as on the model sheet, joined for other strikes by the line IV(K) = 33.70% − 0.2558 × ln(K/1,400) (a model assumption, not RR market data). Bank Rate 3.75%. RR’s interim dividend of 6.0p went ex on Thursday 6 August 2026, inside the options’ life, and is priced as a discrete dividend; RR declared it on 30 July, so on 8 July the market could only estimate the amount the model uses. Both options are American and priced on the binomial tree: put model 55.44p, filled on the 0.25p tick at 55.50p; call model 40.86p, filled at 40.75p. Each leg pays £1.40 a contract in commission, the IBKR UK tiered rate as checked on 26 September 2026, and half of an illustrative 1p quoted spread, 0.50p a share, every time it is traded. The shares: 1,000 bought years ago at 350p, a pool cost of £3,517.50 including £17.50 stamp duty. How the examples are built.

The worst case is the fall to the put strike plus the net cost and the £1.40 to sell or exercise the put: (1,300p − 1,400p) × 1,000 = −£1,000, less £150.30, less £1.40, which is −£1,151.70, 8.2% of the holding. The best case is the rise to the call strike less the net cost: £1,349.70 at 1,550p, and £1,348.30 above it, where the call is assigned and the £1.40 assignment commission applies. Breakeven is 1,400p plus the 14.75p net premium, 1,414.75p (1,416.03p after both legs’ half-spreads and commissions). Per share, the floor sits at 1,284.97p and the cap at 1,534.97p once the net cost is counted.

One rule is structural, not a convention: shares held must at least equal the contract size times the calls written, and any calls beyond that are uncovered. One standard RR contract is 1,000 shares; one RR mini (8RR) is 100. A holder of 1,000 shares can write one standard call or ten minis against them, and a call written against shares held with a different broker is not covered in the account that holds the call.

Floor, cap and the path between them

The solid line is the collar on 16 October against where RR settles. The dashed and dotted lines value the same position on 27 August and on the day it is opened: with both options still holding time value, the position moves far less than the shares on either side of 1,400p, which is the point of it.

On the skew line the model gives 31.8% to RR finishing below 1,300p, where the floor is in use, 29.4% to it finishing above 1,550p, where the cap is, and 38.8% to the range between (model probability, risk-neutral, lognormal, from the skew line, on the share price less the dividend’s present value, 1,394.02p). The floor is more likely to be reached than the cap in this model, and the skew prices the put accordingly.

Which call pays for the put: the zero-cost table

The question every collar starts with is how high the cap can go before the call no longer pays for the put. The table prices three floors on three expiries and solves, on the same model, for the call strike whose premium equals the put’s. ICE sets RR’s listed strikes, and we found no published table of strike intervals (checked 26 September 2026), so the 50p steps in the last column are an assumption: the live chain decides which strikes exist.

• A higher floor pulls the cap down fast. For 16 October, a 1,250p floor is paid for by a call at 1,549p (+10.6%); a 1,350p floor needs a call at 1,460p (+4.3%). Each 50p of extra floor costs about 45p of cap.
• More time buys little more cap. For the 1,300p floor the zero-cost call moves from 1,499p in September to 1,505p in October and 1,513p in November: the put and the call both gain value with time, so the cap barely moves.
• The worked collar pays for a higher cap. Writing the 1,550p call instead of a zero-cost call near 1,505p costs £147.50 of net premium at the fills (£150.30 with commissions), for 45p more room above the price.
• Skew is why the cap is this low. Priced at a flat 33.7% for both strikes, the same 1,300/1,550 collar would cost £30.10 before commission (put 50.63p, call 47.62p); on the skew line it costs £145.80, so the skew adds £115.70. The floor is priced at a higher volatility than the cap, which is also why the model gives the floor the higher probability.
• The same floor alone would cost 14.5% a year. Bought on its own, the 1,300p put takes 4.0% of the holding’s value for 100 days of cover, which scales to 14.5% over a year of repeat purchases at that price (value ÷ 1,400p × 365 ÷ days). The collar swaps most of that cash for the cap. The long put page sets out the cost of protection by strike and expiry on BP.

Three endings on 16 October, and the 30-day trap

Greeks: 1,000 shares that move like 387

At entry the two options almost cancel each other’s sensitivity to volatility (vega £0.08) and to time (theta £0.24 a day), and they cut the holding’s delta from 1,000 to 387. That number is not fixed. With RR unchanged it climbs back towards 1,000 as both options lose their time value: 528 by 27 August and 927 a week before expiry, when the collar behaves almost like the bare shares until RR nears a strike. After an instant fall to 1,173.60p the put dominates, delta falls to 266 and vega turns positive (£14.55); after an instant rise to 1,670.07p the call dominates and vega turns negative (−£17.09). The 27 August column also leaves out the £60.00 dividend the holder received on the way.

The 6 August dividend and the written call

The holder keeps the shares, so the holder keeps the dividend: 6.0p, £60.00 on 1,000 shares, taxed as dividend income. The dividend is also in the option prices. RR was expected to fall by 6p on the ex-date, so the put is worth 55.44p against 53.65p without the dividend, and the call 40.86p against 42.70p: together the collar costs 3.63p a share more because of it.

A written American call can be exercised early, just before an ex-date, when the dividend is worth more to the holder of the call than the time value given up. An options intermediary with stamp duty relief compares the two directly; a private holder who exercises also pays 0.5% stamp duty on the strike, 7.75p a share here (early exercise before an ex-date). On Wednesday 5 August, 72 days before expiry, simple interest on the 1,550p strike alone was worth 11.47p a share, well above the 6.0p dividend, and even at 1,700p the call would have been worth 187.43p, 37.43p more than its intrinsic value. Early assignment for this dividend was not a live risk at any share price. It would be with a week to go: interest on the strike over seven days is 1.11p, so an in-the-money call with little time value left can be exercised the evening before the ex-date, and the holder then delivers the shares without the dividend.

Collar, put, put-spread collar or covered call

The same 1,000 shares, the same chain and the same 16 October expiry, handled four other ways. Each changes a different number.

The put-spread collar is the version that pays the holder to take it on, and the reason is in the worst-case column: below 1,150p the written put gives back the protection, so the holding loses in full again. It covers a fall of up to 18%, to 1,150p, not a collapse, and on the numbers here it trades £213.60 of cash (a £63.30 credit against a £150.30 cost) for the loss of cover below 1,150p.

Selling in stages across 5 April instead

One reason to collar rather than sell is to avoid realising a large gain in a single tax year. The alternative to compare it with is selling in stages, using the annual exempt amount and the unused basic-rate band in more than one year. The figures below are for a reader with £35,000 of taxable income in each year and no other gains, a departure from the site’s usual assumption that the exempt amount is used elsewhere, because using it is the point here. They assume 2026/27 rates and allowances apply in 2027/28 too.

Splitting the sale across 5 April saves this reader £826.94: the gain in each year is smaller, more of it falls inside the exempt amount, and all of what remains fits in the unused basic-rate band at 18%. The cost is market risk on the shares kept, and that is where a collar and the sale can work together. On the 500 shares waiting for April, standard contracts do not fit, but RR has a 100-share mini (8RR), so five minis collar exactly 500 shares. On 8 July the minis listed were the front three months and the next three quarters (July, August and September, then December 2026, March and June 2027), so cover past 6 April means the June 2027 series. Priced for the 18 December 2026 minis (163 days, same skew line) as an example, the 1,300 put at 78.00p (model 78.09p) and the 1,550 call at 66.50p (model 66.61p) cost £57.50 in premium for five minis, plus £17.00 of commission at £1.70 a contract, a stand-in, because IBKR’s UK price list shows no separate rate for minis: £74.50, of which commission is 23%. The same strikes on one standard contract would cost £117.80 for 1,000 shares, £58.90 per 500. The minis are listed on ICE; the site could not confirm that UK brokers offer them or that they trade with a two-way quote, so that is a question for the broker.

UK tax: two legs, two dates, one holding

Each leg is taxed on its own date. Writing the call is a disposal of the call on the day it is written: the premium less costs is a gain in that tax year (TCGA 1992 s144(1)). If the call lapses, that gain stands; if it is bought back, the cost is added to the grant’s costs (s148); if it is assigned, the grant and the share sale become one transaction on the assignment date, and tax already charged on the grant is set off. The bought put is an ordinary disposal when sold and an allowable loss when it lapses (s144(4)); exercised, it sells the shares and its cost comes off the proceeds (s144(3)(b)). None of this touches the shares’ unrealised gain unless a leg delivers them. Option computations go under “Other property, assets and gains” on the SA108 and the share sale under listed shares (which boxes); each rule is worked on the tax examples page.

A collar opened in March 2027

The two legs can land in different tax years. Take a collar opened on Monday 1 March 2027 for the Friday 16 April 2027 expiry (46 days), with RR assumed at 1,400p that day, an assumption for the illustration, and no ex-date in its life. The 1,300 put costs 27.75p (model 27.73p) and the 1,550 call brings 17.00p (model 16.91p). The call’s grant is a 2026/27 gain of £168.60, taxed at £30.35 or £40.46, although the position ends in 2027/28. If both options lapse on 16 April, the put’s £278.90 loss falls in 2027/28: it cannot be carried back against the 2026/27 gain, so the relief is deferred a year, and lost only if it is never used. If RR has fallen to 1,150p and the put is sold on 16 April, its £1,219.70 gain belongs to 2027/28. If the call is assigned in April instead, the grant joins the share sale on the assignment date, which moves the premium out of 2026/27; a 2026/27 return is corrected only if it was filed before then (positions across 5 April).

Tight collars and disguised interest

A collar with its put and call strikes close together fixes the return, and a fixed return can be taxed as income. The disguised-interest rules charge income tax on a return economically equivalent to interest (ITTOIA 2005 s381A; legislation.gov.uk); the exception for arrangements involving only shares (s381E) does not cover shares combined with options. The collar on this page, with the floor 7.1% below and the cap 10.7% above the price, leaves the result to depend on where RR ends; a collar with both strikes at or near 1,400p would lock in a return close to the interest rate and is the kind of arrangement the rules describe. HMRC’s capital gains manual (CG12310) still points to the older provisions that these replaced in 2013.

Employee shares, closed periods and dealing codes

Some large, low-cost holdings are employee shares, and for those the question comes before the price. A director or other person discharging managerial responsibilities (a PDMR) may not deal on their own account in the company’s shares or linked derivatives during the 30 calendar days before an interim or year-end report (UK MAR Article 19(11)); options over the shares are linked derivatives, so a collar can be neither opened nor adjusted then unless the company grants one of the narrow exceptions in Article 19(12), and a PDMR’s dealings are notified once they reach €5,000 in a year. A company’s own dealing code can go further and forbid employees from hedging company shares at all, and share-plan rules can forbid hedging awards that have not vested. The plan rules and the dealing code, not a broker’s willingness to take the order, decide whether a collar is allowed. Holders of US shares, such as vested awards from a US employer, face 100-share contracts priced in dollars, with each leg converted to pounds on its own date for tax (two dates, two rates); a dollar collar protects the dollar price, not its value in pounds (US options from the UK).

Costs, the Rolls-Royce contracts and the account

• Commission. £1.40 a contract per leg on IBKR UK’s tiered rate (£1.70 fixed): £2.80 to open the collar, and £1.40 more on any leg exercised, assigned or closed (checked 26 September 2026; cost conventions).
• The spread. Two legs means two spreads. At 0.50p a share per leg each way on illustrative 1p-wide quotes, crossing costs £10.00 to open and £10.00 to close, next to a net premium of £147.50. A combination order fills both options at one net price; at IBKR, combinations need a margin account, so in a cash account the two legs go in as separate orders.
• Stamp duty. None on the options themselves in normal ICE dealing. On an exercised put or an assigned call the collar holder is the seller of the shares, so the 0.5% on the strike falls on the buyer (who pays SDRT). Buying the shares back after an assignment makes the holder the buyer, so the 0.5% is theirs: £85.00 at 1,700p.
• The contracts. The standard RR option on ICE is for 1,000 shares, priced in pence with a 0.25p (£2.50) tick; it can be exercised on any business day, stops trading at 16:30 on the third Friday of each month, and delivers shares two business days after exercise. RR mini (8RR): 100 shares, 0.25p tick (£0.25), expiries the front three months and the next three quarters (contract sizes).
• The account. IBKR places collars at Options Level 2 (accounts and permissions). The put is paid in full and the call is covered by the shares, which have to stay in the same account while the call is open, so no uncovered-writing permission is involved. An ISA cannot hold options, so a holding inside an ISA cannot carry a collar there (wrappers).

Open this worked example in the strategy builder (1,000 RR shares at 1,400p, the 1,300 put at 55.50p and the 1,550 call at 40.75p, 100 days, with the 6.0p dividend). Because the builder uses European pricing, it backs each leg’s volatility out of these fills rather than using the tree values.