Collar

Psychology:
A collar is really a combination of a covered call, and a protective put. You’ve got protection in the put should the stock fall, but you are also obligated to sell your stock at strike Y should it get there.

The nice thing about a collar is that if the stock does fall, you can offset the cost of the put by the premium you took in on the call. If, on the other hand, the stock doesn’t fall, the premium for the call will soften the blow of losing on the put.

One downside of the collar is that if the stock breaks out beyond strike Y. Your gains are capped at that strike since you sold someone else the right to buy it from you at that strike. That’s why the collar is a lot like a covered call.

Most traders will use a collar as a stock reaches some resistance and a few will do one through earnings. However, if done through earnings and the results are positive, your profits will be capped at strike Y.

Ideally, you want to sell the call at strike Y and take in enough to buy the put at strike X. You might even be able to put the collar on for a small credit if the call is more expensive than the put.

Risk / Reward:

Maximum Loss: The loss is limited to the current stock price minus strike X and minus the cost of trade (could be + credit).

Maximum Gain: The profit is limited to strike Y minus the current stock price and minus the cost of trade (could be + credit).