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Advanced · Lesson 2 of 6Protective puts and collars
A protective put means buying a put on shares you own. It works like insurance: below the strike your losses stop, minus the premium paid. The cost is the premium, which drags on returns if no crash comes.
A collar combines a protective put with a covered call: sell a call above the price to pay for the put below it. A "zero-cost collar" picks strikes where the call premium roughly equals the put premium. You get a floor and a ceiling.
Collars are popular with executives and retirees who want to protect a large gain without selling (and triggering capital gains tax). Check tax rules, because some hedges can affect the 45-day franking holding rule in Australia.
Key takeaways
- Protective put = insurance with a premium cost.
- Collar = put floor paid for by a call ceiling.
- Hedging can affect franking-credit eligibility.
Check your understanding
1. A collar consists of...
- Long call + long put
- Long shares + long put + short call
- Short shares + short put
- Two short calls
Show the answer
Long shares + long put + short call. Shares protected by a put, funded by selling a call.
2. Main cost of a protective put if no crash happens?
- Unlimited loss
- The premium paid
- Assignment
- Higher dividends
Show the answer
The premium paid. Like insurance, you pay whether or not you claim.
Go deeper
- Wikipedia: Protective put
- YouTube videos: protective put collar strategy explained
- Investopedia: collar options
- Wikipedia: Collar (finance)
- ATO: 45 day holding period rule
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