The Collar Options Strategy: How to Lock In Gains and Limit Risk Without Selling Your Position

When markets surge, traders often face a tricky question: “Should I lock in profits now or stay in the position and risk giving some back?”

There’s a smarter path, one that allows you to defend your gains without fully walking away from future upside. It’s called the collar strategy. Used routinely by hedge funds and institutional players, it’s a disciplined approach to managing risk while still leaving room for your capital to grow.

This article walks through the collar strategy in detail, how it works, why professionals use it, and how you can apply it to your own SPY positions (or any highly liquid ETF or stock) to both hedge and harvest smarter.

Why Consider a Collar?

Let’s say you’ve had a strong run in your portfolio. You’ve held SPY, and it’s up big over the past several years. You don’t want to sell, but you also don’t want to sit unhedged through a potential pullback.

A collar gives you a way to:

• Protect your unrealized profits

• Cap downside risk to a known, defined level

• Maintain exposure to additional upside (within limits)

• Keep your long position intact (important for dividends or tax reasons)

And here’s the kicker: the protection can often be financed largely or completely by the strategy itself.

What Is a Collar?

A collar is made up of three components:

1. Long 100 Shares of a stock or ETF (such as SPY)

2. Sell 1 Out-of-the-Money Call (generates income)

3. Buy 1 Out-of-the-Money Put (provides protection)

Think of it as a covered call paired with a protective put. You’re giving up some upside to help pay for downside protection, turning a raw directional bet into a structured, risk-aware position.

This strategy is particularly useful after a strong rally when the risk/reward of holding naked long exposure shifts dramatically.

Example Trade Setup Using SPY (Step-by-Step)

Let’s walk through a real-world collar trade using SPY, the most liquid ETF in the world.

Step 1: Own the Shares

You already own 100 shares of SPY, which is currently trading at $607.12.

You believe in the long-term strength of the market but want to guard against a pullback after a strong run.

Step 2: Sell a Covered Call to Generate Income

To begin the collar, you sell a August 15, 2025 625 call option, which is slightly out-of-the-money and has a delta of approximately 0.32, meaning a moderate chance it expires in the money.

• Premium received: $5.93 per share

• Total premium: $593 per contract

This gives you a modest upside cap at $625 while bringing in $593 to help pay for your protection. It also defines your max gain between now and expiration: if SPY rallies above $625, your shares will likely be called away, locking in a profit.

Step 3: Buy a Protective Put

Now, you use the income from the call sale to help fund a put option that protects against meaningful downside.

In this case, you select the October 17, 2025 575 put, which provides protection if SPY drops roughly than 5% or more. The contract has 114 days until expiration, enough time to hedge against near-term volatility without overpaying for time value.

• Put premium cost: $10.70 per share

• Total cost: $1,070 per contract

Total Net Cost of the Collar

• Put cost: $1,070

• Call credit: -$593

• Net cost of protection: $477 (or $4.77 per share)

This is your total insurance premium for locking in downside protection and limiting upside through mid-October.

You can further reduce this net cost by rolling calls monthly, selling additional out-of-the-money calls in September and October. If done consistently, this can lower, or even eliminate, the cost of the initial hedge.

What Are the Trade-Offs?

With this collar in place:

• Downside is protected below $575, minus the premium paid

• Upside is capped at $625 until August expiration

• Net debit is limited and potentially recoverable through further call sales

• You retain ownership of your shares, so dividend payments and long-term capital gains treatment remain intact

Your risk is limited and defined. Your reward is still open, within a range. This is what intelligent options-based risk management looks like.

Why Individual Traders Overlook Collars

The collar strategy is standard practice for institutional players, but often ignored by individual traders. Why?

• Some don’t like the idea of capping upside

• Others don’t understand how to construct the trade

• Many believe buying protection is “too expensive”

• And frankly, some just don’t want to manage options at all

But that’s where pros gain the edge.

In reality, collars are among the cheapest forms of portfolio insurance when done correctly, especially when you use short calls to offset the cost of the puts. More importantly, they enforce discipline. They eliminate panic selling and help preserve hard-earned gains without abandoning your core investment thesis.

Final Thoughts: A Practical, No-Nonsense Tool

If your portfolio is up significantly, it makes sense to take a portion and collar it. You’re not selling. You’re not panicking. You’re simply saying, “I want to continue participating in the market, but I refuse to give back a large chunk of my gains.”

You’ve already done the hard part, getting in early and sitting through volatility. Now, preserve the win.

Whether you use it on SPY, individual stocks, or sector ETFs, the collar strategy is one of the most underrated tools in the modern investor’s toolbox.

Probabilities over predictions,

Andy Crowder

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