What Is the Advantage of Using a “Collar” Strategy to Reduce the Cost of a Long-Dated Hedge?

A collar strategy involves simultaneously buying a protective put option (the hedge) and selling a call option (the financing) against an underlying asset already owned. The premium received from selling the call offsets the cost of buying the put, thereby reducing or even eliminating the net cost of the hedge.

The trade-off is that the hedger caps their potential upside profit at the strike price of the sold call.