The collar (also “hedge wrapper”) is a protective options strategy that can be established by purchasing an out of the money put option and simultaneously writing an out of the money call option on the same underlying asset. When a large downward move is predicted in the prices of underlying shares, purchasing an out-of-the-money put option would help in preventing huge losses, and would lock in the profits. The premium received from selling the out of the money call lowers the cost of buying the out of the money puts.

More specifically, a collar is a synthesized instrument established by holding shares of an underlying stock, purchasing a “protective put” and writing a “covered call” on that stock. This position seeks a situation where the price of underlying stock rises to match the contractual strike price.