A Protective Collar
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A Protective Collar is an options strategy used by investors to protect gains or limit losses on a stock they already own. It’s like putting a seatbelt on your stock position—you trade off some upside in exchange for downside protection, usually at little to no net cost.
🧠 What Is a Protective Collar?
A collar combines three components:
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✅ Own the Stock
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🛡 Buy a Put Option (protection against losses)
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💰 Sell a Call Option (gives up some upside in exchange for income)
The goal is to cap potential losses while offsetting the cost of the protective put by collecting a premium from the call.
🧾 Example
You own 100 shares of XYZ stock trading at $100:
| Component | Action | Details |
|---|---|---|
| Stock | Already owned | 100 shares of XYZ |
| Put Option | Buy 1 x $95 Put | Costs $2 (insurance policy) |
| Call Option | Sell 1 x $105 Call | Earns $2 (income offset) |
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Net cost = $0 → “zero-cost collar”
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You’re protected below $95
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But you must sell your shares at $105 if assigned
📊 Risk/Reward Profile
| Outcome | Result |
|---|---|
| Stock > $105 | You sell at $105, locking in gains |
| Stock between $95–$105 | You keep the stock and any gains within the range |
| Stock < $95 | You’re protected—you can sell at $95 (your put kicks in) |
🟢 Why Use a Protective Collar?
| Benefit | Why It’s Useful |
|---|---|
| Downside Protection | Limits losses during market drops |
| Cost Efficient | Call premium offsets (or fully pays for) the protective put |
| Great for Volatile Stocks | Especially after strong gains you want to lock in |
| Defined Exit Plan | You know your worst- and best-case scenarios |
🔴 Drawbacks to Consider
| Drawback | Explanation |
|---|---|
| Limited Upside | You give up gains above the strike of the call sold |
| Early Assignment Risk | If the call is ITM near expiration, it may be exercised early |
| Complexity | Slightly more advanced than simply holding the stock |
🧠 Summary
A protective collar is a risk-managed strategy ideal for investors holding appreciated stock who want to lock in profits and protect from downside, all while potentially doing it at little or no cost. It’s commonly used by institutional investors, hedgers, and retirement accounts.
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