The collar structure creates a defined range for your investment. On the downside, a protective put option shields you from losses beyond your chosen floor, typically 80%, meaning your maximum loss is limited to 20%. On the upside, a call option sets a cap on your participation, often around 145-160% of your starting price.
For example, if your stock is trading at $100 with an 80% floor and 160% cap:
You're protected if the stock falls below $80
You participate in gains up to $160
Your risk is limited to 20% downside for approximately 60% upside potential
The options are European-style, meaning there's no risk of early exercise during the term. Settlement only happens at maturity.