For those unwilling to sell but smart enough to hedge, there’s an old-school strategy that institutions use all the time but retail investors often ignore: the protective collar.
Wall Street’s professionals love this play because it locks in profits without forcing them out of the game. A collar strategy lets you stay invested while limiting potential losses. Why don’t more retail investors use it? Simple: they hate giving up the dream of unlimited upside.
But reality has a way of humbling the greedy. A collar gives you something far more valuable: peace of mind.
This strategy involves three key steps:
- Own at least 100 shares of a stock or ETF you want to protect.
- Sell an out-of-the-money call to generate income.
- Buy an out-of-the-money put as insurance against declines.
Think of it as a covered call plus a long put—a way to pocket premium while insuring your portfolio against market turbulence.
Applying the Collar: An Example with SPY
Say you own 100 shares of SPY, currently trading at $585.05. You want to hedge against a potential downturn but still capture some upside.
Step 1: Selling a Call
To help fund your hedge, you sell a May 600 call for $12.00 per share ($1,200 total). This caps your upside but provides premium income.
Step 2: Buying a Protective Put
Next, you purchase a May 570 put for $11.50 per share ($1,150 total), creating a downside safety net.
Step 3: Evaluating the Cost
The net cost of the hedge is:
Put premium ($1,150) – Call premium ($1,200) = $50 credit
Effectively, you’re paid $0.50, or $50 per contract to hedge your position through May, while still benefiting if SPY rises up to $600.
The Payoff: Defined Risk, Measured Reward
- If SPY rises above $600: Your ETF is called away, locking in capital gains up to that level.
- If SPY stays flat: You retain your shares, the $0.50 ($50 per contract) and can sell another call at expiration.
- If SPY drops below $570: Your put kicks in, limiting downside losses.
Collars aren’t designed to make you rich overnight. They’re built to keep you from losing your shirt when markets turn south. This strategy isn’t about chasing home runs—it’s about locking in the gains you’ve already made and ensuring that a market correction doesn’t wipe them away.
With uncertainty looming and valuations stretched, smart investors know the value of playing defense. The protective collar is one of the simplest, most cost-effective ways to stay in the game without betting the farm. The market doesn’t care how confident you are—it punishes carelessness. Trade accordingly.
I’ve been trading options professionally for 20+ years, and if there’s one thing experience has taught me, it’s this: success isn’t about chasing moonshots—it’s about discipline, probabilities, and consistency.
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