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A collar is a financial strategy using call options and put options on a specified underlying investment that, when held with the underlying investment, creates a “cap” and “floor” on the return of the investment during the period that the collar is in effect.

A collar is comprised of a short call option position and long put option position on a given underlying, where the strike price of the call option is greater than the strike price of the put option.  Typically, the number of call options sold is equal to the number of put options purchased, and the proceeds from the short call position is used to purchase the put options.

The payoff of the collar, along with the underlying investment, is illustrated below:

Put options may be attractive to investors that wish to narrow the range of possible returns, and prefer to finance the purchase of a put option by selling away some of the “upside” potential of the investment to another investor.

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