Zero-cost collars: protecting a stock you can't sell

I worked with a partner once who had inherited a large position in a single stock. Capital gains made selling unattractive. He could not stomach a 30% drawdown. The collar is the trade I built him. Variants of it have served clients in similar spots for decades.

The structure

• You own 100 shares of stock per contract.
• Buy a protective put 5 to 8% below the current price.
• Sell a covered call 5 to 8% above the current price.
• Same expiration, usually 60 to 90 days out.

Choose the strikes so the call premium roughly covers the put premium. That is the "zero-cost" part. Net cash out of pocket: roughly nothing.

What you give up

Upside above the call strike. If the stock rallies past your call, you give up the gains beyond that level. If you bought a $200 stock and sold the $215 call, your upside caps at $215 until the call expires.

That is the trade. You traded uncapped upside for capped downside. For someone in a long-term hold, that is usually a bargain.

The collar is the only options trade I would put on a position I cannot afford to lose.

When to use it

• Concentrated single-stock positions you cannot or will not sell.
• Holding through earnings, an FDA decision, or a known event.
• Pre-IPO lockups (when you finally can sell, but want to wait).
• Year-end tax planning where you want to defer a capital gain.

What to do next

Open the portfolio audit (when it lands) for any long stock position. The collar suggestion will surface automatically with strikes pre-picked. Read it, decide whether the upside cap is acceptable for your situation, then place the trade.