A collar is an options strategy that brackets your outcomes on an asset you hold. You buy a protective put below the current price to set a floor on your losses, and you sell a covered call above it to cap your gains and fund the put. The result is a position whose downside and upside are both known in advance. This article covers the collar, the zero-cost collar, the risk reversal, and delta-neutral setups.
A collar combines a long asset, a protective put (the floor), and a covered call (the cap). Your outcome is bracketed between a known maximum loss and a known maximum gain
A zero-cost collar tunes the strikes so the call premium fully funds the put. Downside protection at no net premium, in exchange for a tighter cap on upside
A risk reversal is the collar's speculative cousin: sell one option to finance buying the opposite, usually without holding the underlying
A delta-neutral setup is built so small price moves do not change its value, isolating volatility or time decay as the source of return
On Paradex, all the legs share one unified margin account, so multi-leg structures like collars are practical for a self-custodial trader
What is a collar in options?
A collar is an options strategy that combines an asset you own with a protective put bought below the current price and a covered call sold above it. The put sets a floor on your downside. The call caps your upside, and its premium helps pay for the put. The result is a position whose outcomes are bracketed between a known maximum loss and a known maximum gain.
If you have read the previous two articles, you already know both halves. A collar is a protective put and a covered call applied to the same holding at the same time. The put is the insurance; the call is how you pay for it. Where a protective put alone costs a premium and leaves your upside open, a collar uses the sold call to subsidise or fully fund that premium, accepting a ceiling on gains in exchange.
The collar payoff has a distinctive bracketed shape: a flat floor below the put strike, a diagonal that tracks the asset between the two strikes, and a flat ceiling above the call strike.
Collar payoff at expiry. Hold 1 BTC at $90K, buy an $85K put, sell a $100K call. Loss floored at $5K, gain capped at $10K.
How does a collar work?
Numbers make the bracket concrete. Here is a collar built on a single BTC holding, using the same prices as the diagram above.
Worked example
Setup: You hold 1 BTC, currently worth $90,000. You buy an $85,000 protective put and sell a $100,000 covered call, both expiring in one month. The call premium received roughly equals the put premium paid, so the collar costs about $0 net (a zero-cost collar).
Scenario A (BTC crashes to $70,000): Your spot position loses $20,000, but the $85,000 put is worth $15,000, offsetting most of it. Your loss is floored at $5,000 (the gap between your $90,000 entry and the $85,000 put strike). Without the collar you would have lost $20,000.
Scenario B (BTC stays at $90,000): Both options expire worthless. You keep your BTC, and the collar cost you nothing net. P&L: $0.
Scenario C (BTC rallies to $120,000): Your spot gains $30,000, but the $100,000 call you sold is exercised, capping your gain at the $100,000 strike. Your profit is floored at $10,000 (the gap between entry and the call strike). You gave up $20,000 of the rally in exchange for the downside protection.
That is the collar's trade: you accept a ceiling on the rare large rally in exchange for a floor under the painful crash. For a long-term holder who wants to stay invested but cannot stomach an open-ended drawdown, it is one of the most rational structures available.
The zero-cost collar
A zero-cost collar is a collar where the premium from the sold call fully funds the put, so the protection costs nothing upfront in net premium. You choose the two strikes so the call premium and put premium roughly offset. In the example above, selling the $100,000 call paid for the $85,000 put, which is why the net cost was about zero.
The trade-off is the width of the bracket. To fund a higher floor (a put closer to the current price), you must sell a closer call, which tightens your cap. To keep more upside (a further call), you accept a lower floor. The zero-cost collar is popular precisely because it delivers genuine downside protection without a cash outlay, and the costless collar and protective collar are variations on the same idea. The cost is simply paid in forgone upside rather than in premium.
What is a risk reversal?
A risk reversal is an options structure built by selling one option to finance buying the opposite one, usually without holding the underlying asset. A bullish risk reversal sells a put and buys a call: you profit if the asset rises, funded by taking on the obligation to buy if it falls. A bearish risk reversal does the reverse.
The risk reversal is the collar's speculative cousin. A collar wraps a put and a call around an asset you hold to protect it; a risk reversal uses the same two options on their own to express a directional view cheaply or at zero cost. Because one premium funds the other, a risk reversal can be entered for little or no net cost, but the sold leg carries real obligation: a bullish risk reversal loses if the asset falls below the sold put strike, much like being assigned on a cash-secured put. It is a defined structure with an undefined-looking entry cost, which makes understanding the sold leg essential.
What is a delta-neutral strategy?
A delta-neutral strategy is a position constructed so its net delta is zero, meaning small moves in the underlying price do not change the position's value. Delta measures how much an option's value moves for a $1 move in the underlying; a delta-neutral position combines holdings so those sensitivities cancel out. (For a refresher on delta and the other risk measures, see the Greeks explained.)
Why remove directional exposure deliberately? Because it lets you isolate a different source of return. A delta-neutral trader is not betting on whether BTC goes up or down; they are betting on volatility, on time decay, or on the spread between related instruments. By neutralising direction, they keep only the exposure they actually want.
Delta neutrality is not static. As the underlying moves, delta drifts, so the position must be rebalanced to stay neutral, a process called dynamic hedging. In crypto, one of the most practical ways to build and maintain a delta-neutral position is to combine options with a perpetual futures position, using the perp to offset the options' delta. That combination is the subject of our guide on using perpetuals as a hedge while running options strategies.
How does a collar compare to a protective put and a covered call?
The collar sits between the two strategies it is built from. Seeing the three side by side shows exactly what the collar adds and what it gives up.
Feature
Collar
Protective put
Covered call
Structure
Spot + put + call
Spot + put
Spot + short call
Downside
Floored at put strike
Floored at put strike
Open (premium cushion only)
Upside
Capped at call strike
Open
Capped at call strike
Net cost
Low or zero (call funds put)
Premium paid
Premium received
Best for
Protection without paying net premium
Full protection, upside intact
Income on a flat-to-up view
In one line: the protective put buys protection and keeps the upside; the covered call earns income and caps the upside; the collar combines them so the call pays for the put, giving you protection at low or zero net cost in exchange for that cap.
How do you build a collar on Paradex?
Paradex is an on-chain venue for crypto options, perpetual futures, and spot, all from one self-custodial account. Multi-leg structures like collars are where its unified margin system matters most: because the spot, the put, and the call all share one USDC collateral pool, the three legs of a collar offset and collateralise together rather than each demanding separate margin. On a platform with siloed margin, building a collar means funding three positions independently; here it is one account.
To build a BTC collar:
1Hold the underlying. Start with the spot BTC you want to protect. Open the BTC options chain and connect your wallet.
2Buy the protective put (the floor). Choose a put below the current price, commonly 5 to 15 percent lower. This sets your maximum loss.
3Sell the covered call (the cap). Choose a call above the current price. The premium received funds the put. This sets your maximum gain.
4Tune for zero cost. Adjust the two strikes so the call premium offsets the put premium if you want a zero-cost collar. A higher floor needs a closer cap, and vice versa.
5Confirm the combined payoff. Use the payoff chart to verify the bracketed outcome before confirming: floored loss, capped gain, spot tracking in between.
6Set your exit and review plan. Decide whether to hold to expiry or unwind early, and plan to roll the collar if your protection horizon runs past expiry.
A few things that make Paradex suited to multi-leg trading: a flat 0.0075% options fee, capped at 12.5% of the premium for retail accounts (multi-leg structures involve several fills, so per-trade fees compound quickly elsewhere; see the trading fees documentation), self-custody throughout, position privacy via ZK technology, settlement on Paradex Chain (StarkNet L2), and institutional liquidity from the team behind Paradigm, the largest institutional options liquidity network in crypto. Wherever you can lawfully access Paradex, the experience is identical: one wallet, one USDC account, every leg in one place.
If you would rather hold systematic multi-leg options strategies than build and roll them yourself, our piece on Vault Traded Funds (VTFs) covers the on-chain primitive for exactly that. For live volume and open interest, see paradex.trade/stats; for full mechanics, the documentation covers margining and settlement end to end.
Build your first collar. Open the Paradex options chain, hold your BTC, buy a put below and sell a call above, and watch the payoff chart bracket your outcome. Connect your wallet to get started.
What are the risks of collars and multi-leg strategies?
Multi-leg strategies are defined-risk by design, but they carry trade-offs worth understanding before you build one.
The cap is a real cost. A collar gives up the large rally. If BTC doubles, you keep only the gain up to the call strike. That forgone upside is the price of the protection, and in a strong bull market it can feel expensive. Only collar a holding when you genuinely value the floor more than the uncapped upside.
Both options expire. A collar protects only until its expiry. If your concern extends further, you must roll the position, which incurs new premiums and resets the strikes. Protection is a subscription, not a one-time purchase.
The sold leg carries obligation. In a collar the sold call is covered by your spot, so assignment simply means selling at the strike. But in a risk reversal without an underlying, the sold leg is a genuine obligation: a bullish risk reversal can lose substantially if the asset falls below the sold put strike. Understand the sold leg before entering any structure that has one.
Delta-neutral requires maintenance. A delta-neutral position only stays neutral if you rebalance as the underlying moves. Left alone, it drifts back into directional exposure. The strategy rewards active management and a clear process, not set-and-forget.
Risk reminder: Options and multi-leg strategies involve risk, including the loss of premiums paid and obligations on sold legs. Strategies that combine options with leveraged instruments such as perpetuals carry liquidation risk. Only trade with capital you can afford to lose, and understand every leg of a structure before entering it.
What is the one thing to remember?
A collar lets you decide your range in advance. You set the floor with a put and the ceiling with a call, and the call pays for the put. In exchange for giving up the tail of a big rally, you remove the tail of a big crash, often at no net cost. It is the clearest expression of a simple idea that runs through this whole series: options let you shape your exposure to exactly the range you are willing to live with.
The collar, the risk reversal, and the delta-neutral setup are all ways of combining simple legs into a position that does something no single leg can. The protective put protects, the covered call earns, and combined as a collar they protect at low cost. Master the two single-leg trades first, then the multi-leg structures become straightforward: they are just the building blocks, assembled with intention.
Frequently asked questions
A collar is an options strategy that combines an asset you own with a protective put bought below the current price and a covered call sold above it. The put sets a floor on your downside, and the call caps your upside while its premium helps pay for the put. The result is a position whose outcomes are bracketed between a known maximum loss and a known maximum gain. It is the synthesis of a protective put and a covered call on the same holding.
A zero-cost collar is a collar where the premium received from selling the call fully covers the premium paid for the put, so the protection costs nothing upfront in net premium. You choose strikes such that the call premium and put premium roughly offset. The trade-off is a tighter cap on your upside: to fund a higher floor, you sell a closer call, giving up more potential gain. It provides downside protection at no net cash outlay.
A protective put buys downside protection by paying a premium, leaving your upside fully open. A collar adds a sold call on top of that protective put: the call premium subsidises or fully funds the put, lowering or eliminating the cost of protection, but in exchange it caps your upside above the call strike. A collar is a protective put with the cost reduced by giving up some upside potential.
A risk reversal is an options structure built by selling a put and buying a call (a bullish risk reversal), or selling a call and buying a put (a bearish risk reversal), usually with no underlying position. It expresses a directional view financed by selling the opposite option. A bullish risk reversal profits if the asset rises, funded by taking on the obligation to buy if it falls. It is the speculative cousin of the collar, without the spot holding.
A delta-neutral strategy is a position constructed so its net delta is zero, meaning small moves in the underlying price do not change the position's value. Traders build delta-neutral positions to isolate other factors such as volatility or time decay, profiting from those rather than from direction. Delta neutrality is maintained by adjusting hedges as the underlying moves, since delta drifts as price changes. It removes directional exposure to focus on a different edge.
Use a collar when you hold an asset long-term, want to protect against a near-term decline, and are willing to cap your upside to reduce or eliminate the cost of that protection. It suits a holder who is cautiously neutral: not bearish enough to sell, but unwilling to absorb a large drawdown. A zero-cost collar is ideal when you want a floor without paying net premium and accept a ceiling on gains in return.
On a collar, the maximum loss is set by the put strike: below it, the put offsets further declines, so your loss is floored at the difference between your entry and the put strike, plus or minus the net premium. The maximum profit is set by the call strike: above it, the sold call caps your gains. Outcomes between the two strikes track the underlying. The collar brackets your result between a known floor and a known ceiling.
A collar is neutral to mildly bullish. It is used by someone who holds an asset and remains long-term constructive but wants protection against a near-term fall. It is not a bearish position, since you keep the underlying and benefit from moderate rises up to the call strike. It is not aggressively bullish either, because the sold call caps how much upside you keep. It is a defensive, range-bracketing stance.
Yes. On Paradex you can build a BTC collar by holding spot, buying a protective put below the current price, and selling a covered call above it, all from a single self-custodial USDC account. Because options and spot share one unified margin pool, the three legs of the collar collateralise efficiently together rather than requiring separate accounts. This makes multi-leg structures like collars practical for self-custodial traders.
Yes. Paradex is accessible globally through a self-custodial wallet connection, giving traders a direct route to multi-leg options strategies such as collars, risk reversals, and delta-neutral setups without going through a centralised platform. You can build these structures on BTC from a single USDC account on Paradex Chain (StarkNet L2). Access may be restricted in some jurisdictions, so check the rules that apply where you are before trading.
Ready to bracket your BTC outcome? Open Paradex, hold your spot, and build a collar by buying a put below and selling a call above, all in one unified-margin account. Set your floor, set your cap, and trade your chosen range.
Low fees, self-custody, and institutional liquidity from the team behind Paradigm. Browse live markets on the stats page or read the documentation.
Trading options, perpetual futures, and other crypto derivatives involves substantial risk. Multi-leg strategies carry the loss of premiums paid and obligations on sold legs; structures combining options with leveraged instruments such as perpetuals carry liquidation risk. This content is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Do your own research before trading.
Paradex is a decentralised protocol. Access may be restricted in certain jurisdictions. Verify your local regulations before using the platform.
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