How Does a ‘Collar’ Strategy Use Both Options and the Underlying Asset?

A collar strategy is an options strategy used to protect a long position in an underlying asset, like a cryptocurrency. It involves holding the asset, buying an out-of-the-money (OTM) put option, and simultaneously selling an OTM call option.

The put option sets a floor, limiting potential losses below a certain price. The sold call option generates premium to offset the cost of the put, but it also caps the potential profit.

This creates a risk-reward band.