A collar 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.

A collar trade is a combination of a collar and a long position in equity, where the underlying equity is posted as collateral for a loan that finances the long position in equity. This trade allows investors to borrow money using equity shares as collateral while hedging against potential decreases in stock prices.

In addition to the above, a collar trade can be established in many alternative ways including selling one out-of the-money (OTM) call and buying one at-the-money (ATM) put for the same underlying and expiration date.