An index collar combines purchased index puts with written index calls. It can reduce broad-market downside while limiting upside, but it does not lock in the value of an arbitrary stock portfolio. Protection depends on the holdings’ behavior relative to the index, the strikes, quantity, expiration and settlement terms.
The call premium helps finance the puts. Under a perfectly tracking portfolio assumption, the put strike establishes a lower expiration band and the call strike an upper band. The portfolio can still gain between the starting index level and the call strike; differing holdings can depart from either band.
Implementation
Choose a listed index-option product with an appropriate relationship to the holdings and verify its current specifications. Historical correlation helps assess that relationship, but is not a guarantee. A portfolio concentrated in technology or a few companies can behave differently from a broad index during stress.
The following notional-matching estimate assumes the portfolio tracks the index proportionally. It is not a universal delta-neutral hedge ratio. The later section shows how beta and option delta change initial exposure estimates.
Illustrative notional quantity = portfolio value ÷ (index level × contract multiplier)
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Example
A fund manager oversees a well diversified portfolio consisting of fifty large cap U.S. stocks with a combined value of $10,000,000 in October. Worried by news about surging oil prices, the fund manager decides to hedge their holding by purchasing slightly out-of-the-money S&P 500 index puts while selling an equal number of slightly out-of-the-money S&P 500 index calls expiring in two months' time. The current level of the S&P 500 is 1500 and the DEC 1475 SPX put contract costs $20 each while the DEC 1525 SPX call contract is quoted at $25 each.
With the $100 SPX multiplier, this example uses $10,000,000 ÷ (1,500 × $100) = 66.67, rounded to 67 put/call pairs. Rounding slightly overhedges the assumed index notional. It does not establish full protection for the actual holdings.
- Total cost of the put options is: 67 x $20 x $100 = $134,000.
- Total premium collected for selling the call options is: 67 x $25 x $100 = $167,000.
- Net premium received is: $167,000 - $134,000 = $33,000.
| S&P 500 Index | Call Option Value | Put Option Value | Net Premium Received | Unhedged Portfolio | Hedged Portfolio |
| 1200 | $0 | $1,842,500 | $33,000 | $8,000,000 | $9,875,500 |
| 1300 | $0 | $1,172,500 | $33,000 | $8,666,667 | $9,872,167 |
| 1400 | $0 | $502,500 | $33,000 | $9,333,333 | $9,868,833 |
| 1500 | $0 | $0 | $33,000 | $10,000,000 | $10,033,000 |
| 1600 | -$502,500 | $0 | $33,000 | $10,666,667 | $10,197,167 |
| 1700 | -$1,172,500 | $0 | $33,000 | $11,333,333 | $10,193,833 |
Under these exact assumptions, the puts offset most losses below their strike and the short calls limit gains above theirs. The different put and call strikes create a range of outcomes, rather than one locked portfolio value. Whole-contract rounding also leaves a small residual index exposure.
These are historical teaching inputs, not current quotes. The table assumes the portfolio changes in exact proportion to the index and that the final index level is the options’ official settlement value. Beta of 1.0 alone does not establish perfect tracking. Values are rounded to the nearest dollar and exclude trading costs, dividends, financing, tax and interim collateral requirements.
Scope of the risk estimate
This page describes a family of positions or a hedge. Exact profit, loss and breakeven depend on the specified legs, valuation date, contract terms and any underlying portfolio. A portfolio hedge also depends on basis and correlation; protection is not guaranteed. Do not infer an exact payoff or a risk-free arbitrage from the strategy name alone.
Beta matching is a starting estimate
Suppose a $200,000 portfolio has estimated beta 1.2 to an index. The first-order market exposure is about $240,000. At index 5,000 with a $100 multiplier, one put with delta −0.40 has roughly −$200,000 of dollar delta. Neutralizing the estimate would require about 1.2 contracts, which cannot be traded as a whole standard contract. A smaller contract may allow finer sizing, with its own cost and liquidity trade-offs.
One standard put leaves approximately +$40,000 dollar delta initially; two would overhedge that estimate. A 5% index decline suggests about a 6% portfolio decline under the beta assumption, or $12,000, but the put’s actual change requires repricing and beta can change.
Stress a company-specific loss when the index is flat, an index rally with hedge premium decay, and a decline after the hedge expires. Include premium and exit costs. A put on an index does not establish a contractual floor for a portfolio with different holdings.
Keep the hedge’s settlement reference and last trading time aligned with the intended horizon. A close-to-close portfolio loss and an AM index settlement can diverge even when the holdings track the same benchmark well over longer intervals.
