Before we jump into the details, a quick note: If you’re looking for clear, practical education on options trading — without the noise — I invite you to check out The Option Premium.
It’s my free weekly newsletter, built for traders who want to make smarter, more disciplined decisions.
Each issue breaks down actionable strategies, market insights, volatility signals, and premium-selling opportunities — always through a risk-first lens.
Whether you’re placing your first iron condor or managing a portfolio built around poor man’s covered calls, you’ll find ideas and tools you can put to work immediately.
The market has been on a tear lately. And if the flood of questions landing in my inbox is any sign, many of you are wondering the same thing:
“How do I protect the gains I’ve made — without giving up more upside than necessary?”
Good question. There’s no crystal ball that tells us exactly when to hedge. But there are smart, disciplined strategies that help us prepare for the inevitable pullback — without surrendering the ability to make more money if the rally keeps going.
One of my favorites? The protective collar. It’s simple. It’s cheap. And if you understand how to use it, it can be one of the most powerful tools in your risk-management arsenal.
Today, we’ll walk through the basics — and then build a real-world example, using a widely traded stock (WMT).
The Protective Collar: What It Is (and Why You Should Care)
At its core, a collar strategy does two things:
- It protects your unrealized gains if the market turns against you.
- It still allows you to profit if the market continues higher — just with a cap on how much you can make.
Here’s the basic setup:
- You own 100 shares of stock (or an ETF).
- You sell an out-of-the-money call to generate income.
- You buy an out-of-the-money put to protect your downside.
Think of it as a covered call married to a protective put — a cautious but calculated way to lock in gains without abandoning a position you still believe in.
Yet most individual investors shy away from collars. Why? Because of greed. Giving up some upside feels painful, even when it’s the right move.
Meanwhile, institutional investors — the ones who must survive — use collars all the time. They know the truth: Risk management is not optional. It’s the bedrock of long-term success.
Without disciplined risk management, even the best stock picking won’t save you. And collars offer one of the cheapest, most effective ways to keep risk under control.
Setting Up a Collar: A Step-By-Step Example Using WMT
Let’s get practical.
Imagine you own 100 shares of Walmart (WMT) — a popular small-cap index fund that’s had a strong run lately, but is starting to show some weakness.
You want to:
- Hold onto your shares
- Continue participating in any upside
- But protect yourself against a sudden 5–10% pullback
Here’s how we could set up a collar:
Step 1: Sell a Call
First, we sell an out-of-the-money call to collect premium. I typically aim for an option that expires in 30–60 days, with a delta around 0.40 — enough premium to make it worthwhile, but not so close to the current price that you cap your upside too tightly.
At the time of writing:
- WMT is trading at $95.83
- We could sell the June 27, 2025 101 call (about 45 days to expiration) for $1.94 per contract.
That’s $194 in your pocket over 45 days — money you’ll use to help buy your protective put.
Step 2: Buy a Put
Next, we buy a protective put.
Here, I prefer a longer-dated expiration — maybe 90–120 days out — because I want real downside protection, not just a few weeks’ worth.
Looking at the August 15, 2025 expiration (94 days out):
- We could buy the 87.5 put for around $2.07 ($207 per contract).
This put gives you protection if WMT drops 8.7%.
Step 3: Calculate the Net Cost
Your total cost for setting up the collar:
- Cost of Put: $207
- Premium from Call: –$194
- Net Cost: $0.13 or $13 debit
In short, for $13, you’ve bought yourself substantial downside protection for the next several months — while still leaving the door open for more gains. For instance, you can sell another call and bring in another $200 in premium before your put expires.
What Happens From Here?
Here’s how the collar shapes your outcomes:
- Upside capped at 101: If WMT rallies past $101, you’ll have to sell your shares at that strike price. You still pocket gains from $95.83 to $101 (about a 5.4% gain) plus the premium you received.
- Downside protected below 87.5: If WMT falls, your put kicks in around $87.5, shielding you from deeper losses.
- Time advantage: As I stated before, after June expiration, you can sell another call against your shares — while your put protection stays in place until August, adding to your return.
In short: You lock in your existing gains, protect against nasty surprises, and stay in the game if the rally continues.
Why Collars Work (and Why They’re Underused)
It’s easy to get greedy in strong markets. We start to believe that gains are inevitable — and that hedging is somehow “giving up” potential profits.
But that’s backward thinking.
Collars don’t take you out of the game. They keep you in it — on your terms.
Done right, collars let you:
- Stay invested in high-conviction stocks and ETFs.
- Limit catastrophic losses if volatility returns.
- Collect premium that offsets the cost of protection.
In volatile markets, that’s not a luxury. It’s a necessity.
The hardest part of using collars is psychological: accepting that some of the upside must be traded for peace of mind.
The best investors — the ones who last decades, not just months — understand that.
Final Thoughts
Adding the collar strategy to your toolkit won’t just protect your current gains. It will change how you think about risk, reward, and discipline.
You’ll stop asking, “How much can I make?” And start asking, “How much risk am I taking to make it?”
In the long run, that shift — subtle but profound — makes all the difference.
If you’re looking for more straightforward ideas on trading and risk management, I write a free weekly newsletter called The Option Premium.
Each week, I break down practical strategies, trade setups, and lessons from over 20 years of trading — along with my Implied Truth Table, a weekly snapshot of where volatility, breadth, and price extremes are offering opportunities for premium sellers.
You can sign up here if you’d like to get it delivered straight to your inbox.Probabilities over predictions,
Andy Crowder
