In the unpredictable world of investing, Australian investors are always looking for strategies to minimise losses while still capturing upside potential. One such strategy gaining renewed attention in 2025 is the ‘collar’. But what exactly is a collar, and how can you use it to safeguard your investments in a volatile market?
What Is a Collar Strategy?
A collar is a risk management approach that involves holding a stock while simultaneously buying a put option (to protect against downside) and selling a call option (to generate income and offset the put’s cost). The goal? To limit both losses and gains within a predefined range, giving investors more certainty in turbulent times.
- Put option: Purchased to set a floor price, limiting potential losses.
- Call option: Sold to generate income, which helps pay for the put. However, this caps your upside potential.
For example, if you own shares of an ASX-listed company trading at $40, you might buy a put at $38 and sell a call at $44. If the stock price plummets, your losses are cushioned. If it soars, your gains are capped at $44.
Why Are Collars Relevant in 2025?
Australian markets have seen heightened volatility in the wake of global economic uncertainty, persistent inflation, and the RBA’s cautious approach to interest rates. With the ASX 200 fluctuating and geopolitical concerns impacting sentiment, collars offer investors a disciplined way to navigate risk.
Several 2025 policy and regulatory updates have also influenced option trading:
- ASIC’s tightening of retail derivatives regulation has led to improved transparency and risk warnings for structured products, including collars.
- ASX’s 2025 option contract reforms have made it easier for investors to execute multi-leg strategies like collars, with streamlined margin requirements and enhanced reporting.
- Superannuation funds are increasingly using collars to protect member balances, especially for those nearing retirement and seeking capital preservation amid market swings.
These trends mean more Australian investors are exploring collars, both for direct share portfolios and within managed funds or SMSFs.
Real-World Collar Scenarios for Australian Investors
Collars aren’t just for the ultra-wealthy or professional traders. Everyday investors can benefit from this approach in several scenarios:
- Protecting windfall gains: Suppose you bought CSL shares at $250 and they’ve surged to $320. A collar can lock in much of your profit while protecting against a sharp reversal.
- Managing concentrated positions: Many Australians accumulate large holdings in a single company through employee share plans. Collars can reduce risk without forcing an immediate sale (and triggering capital gains tax).
- Superannuation glide path: As retirement approaches, super funds may use collars to protect portfolios from market corrections while still allowing for modest upside.
Platforms like CommSec and nabtrade now offer improved tools for constructing collar strategies, and some robo-advisers are exploring automated collar overlays for risk-conscious clients.
Key Considerations and Risks
While collars offer downside protection, they’re not a one-size-fits-all solution. Here’s what to keep in mind:
- Upside is capped: By selling a call, you limit your potential gains above the strike price.
- Transaction costs: Option trades involve brokerage and sometimes higher spreads, especially for less liquid ASX stocks.
- Tax implications: The timing and structure of options can affect capital gains calculations. Always check the latest ATO guidance for 2025.
- Complexity: Collars require ongoing monitoring and understanding of options expiry, assignment risk, and market movements.
In short, collars can be a valuable tool in your portfolio risk management toolkit, but they require planning and a clear understanding of your financial goals.
Conclusion: Is a Collar Right for You?
As 2025 unfolds, risk management remains top of mind for Australian investors. Collars offer a practical, flexible way to protect gains and limit losses in an uncertain world—whether you’re managing a nest egg, a concentrated shareholding, or a self-managed super fund. With updated ASX rules and more accessible trading platforms, now is an opportune time to consider how collars might fit your investment strategy.
