Long underlying stock/future
Short OTM call option
Long OTM put option
Maximum Loss: Any loss taken on the stock +/- the premium for the options. The loss on the stock will be the purchase price of the stock minus the strike price of the put option (as you will exercise at that price) plus the net premium paid or received.
Maximum Gain: The profit of the stock +/- the premium for the optoins. The profit on the stock will be the strike price of the call option minus the purchase price of the stock (as you will be exercised and deliver at the strike) plus the net premium paid or received.
As you can see from the above payoff chart, a collar behaves just like a long call spread.
It is suited to investors who already own the stock and are looking to:
Covered calls are becoming very popular strategy for investors who already own stock. They sell out-of-the-money call options at a price that they are happy to sell the stock at in return for receiving some premium upfront. If the stock doesn't trade above this level, the investor keeps the premium.
The problem with covered calls is that they have unlimited downside risk.
The solution to this is to protect the downside by buying an out-of-the-money put.
This increases the cost as you will have to outlay more to purchase the put and hence lowers your overall return.