The LEAPS Collar: Protecting Your PMCC When Conviction Wavers

I remember the first time a subscriber called me in a panic about a PMCC position that had gained 40% in three months.

"Should I close it?" he asked. "What if it gives it all back?"

He wasn't worried about being wrong. He was worried about being right too early, then watching profits evaporate before his thesis fully played out.

That's when collars on LEAPS positions become interesting. Not as a strategy you plan from day one, but as a defensive adjustment when you've got gains you want to protect or exposure you're suddenly uncomfortable with.

Let me show you how to think through this properly, because the mechanics matter more than most realize.

When Protection Becomes Necessary

You're running a Poor Man's Covered Call. You bought a deep in-the-money LEAPS call months ago, you've been selling short-dated calls against it, and things have worked. The position is profitable. Your cost basis has dropped from collected premiums. Life is good.

Then something changes.

Maybe the stock has run hard and you're worried about a pullback. Maybe earnings are approaching and implied volatility is spiking. Maybe the entire market feels toppy and you want to lock in gains without closing a position you still believe in long-term. Or perhaps you've simply made enough money that losing it would sting more than missing additional upside.

This is the exact moment when adding a protective put, creating a collar around your existing PMCC, makes strategic sense.

You're not abandoning your thesis. You're acknowledging that conviction and comfort with risk are two different things. You can believe a stock will be higher in twelve months while simultaneously wanting protection against the next three.

Understanding What You Already Own

Before adding protection, you need to clearly understand your current position's risk profile.

Let's work with specifics. Say you bought the $80 LEAPS call on a stock now trading at $110, and you paid $28 for it eight months ago. You've been selling short calls and collecting $2 per month on average, so you've taken in $16 in premium. Your effective cost basis is now $12 ($28 minus $16 in collected premium).

Your breakeven is $92 ($80 strike plus $12 net cost). Every dollar the stock trades above $92 is profit, though that profit is capped at whatever short call strike you've sold.

Your risk is the full $12 you have invested, $1,200 for the position. If the stock craters, your LEAPS call could expire worthless and you'd lose everything you've put in, minus whatever premium you can still collect on the way down.

That's your baseline. Now let's talk about protecting it.

The Mechanics of Adding a Protective Put

The simplest form of protection is buying an out-of-the-money put. This converts your naked long call into a long call spread, a position with defined maximum loss.

Using our example with the stock at $110, you might buy a $100 put for, say, $3.50. This guarantees you can sell the stock at $100 regardless of how far it falls.

Here's the critical calculation: Your LEAPS call has an $80 strike, so if the stock falls to $100, your call is worth at least $20 (the intrinsic value of being $20 in-the-money). But you also own a $100 put, which lets you sell at $100. The combination locks in a floor.

Your maximum loss becomes: ($80 strike minus $100 put strike) plus $12 original cost plus $3.50 put cost, minus any remaining premium you can collect. In this case, if the stock falls to $100 or below, your long call is worth $20 (intrinsic value), your put is worth $10 (stock at $100, put strike at $100 means $10 of protection value from $110 to $100), and you've spent $15.50 total ($12 remaining cost basis plus $3.50 for the put).

Actually, let me recalculate that properly because the math matters here.

If the stock falls to $100: Your $80 LEAPS call is worth $20 (intrinsic value). Your $100 put is worth $0 (stock is at the strike, so no value). You've spent $12 net on the LEAPS and $3.50 on the put, for $15.50 total. You can sell the LEAPS for $20. Net result: you make $4.50 ($20 minus $15.50).

If the stock falls to $90: Your $80 LEAPS call is worth $10 (intrinsic value). Your $100 put is worth $10 (right to sell at $100 when stock is $90). Combined value is $20. You've spent $15.50 total. Net result: you make $4.50.

That's the floor, the put locks in that $4.50 minimum value across any price below $100.

Financing Protection: The True Collar

Buying puts outright works, but it's expensive. You're paying $3.50 per share ($350 per contract) for protection that might never get used. That's money coming directly out of your profit.

This is where the collar structure becomes elegant.

Instead of just buying the put, you simultaneously sell an out-of-the-money call to finance it. This is separate from your ongoing PMCC short calls, think of it as a longer-dated overlay.

Let's say you sell a $120 call expiring in 90 days for $4.00, while buying that same 90-day $100 put for $3.50. You've collected $0.50 net (a small credit), and you've defined both your floor and your ceiling.

Your maximum profit is now capped at $120. If the stock runs to $130, you don't participate beyond $120 because you've sold that call. But you've protected your downside to $100 without spending any money, in fact, you collected $0.50.

The tradeoff is explicit: limited upside in exchange for defined downside, financed by accepting that limitation.

Strike Selection: Where the Real Decisions Live

This is where theory meets psychology, and where most traders stumble.

Your protective put strike determines how much loss you're willing to accept before protection kicks in. Buy a $105 put on a stock trading at $110, and you've got tight protection with only $5 of downside exposure. Buy a $95 put, and you're accepting $15 of risk before the put has any value.

Tighter protection costs more. Always. The $105 put might cost $5.50 while the $95 put costs only $2.00. You're paying for certainty.

Your short call strike determines how much upside you're surrendering. Sell the $115 call and you've only got $5 of room to run. Sell the $125 call and you've got $15, but you'll collect less premium.

Here's how I think through strike selection when I'm protecting a PMCC that's already profitable:

First, I identify my pain point. If I've made $800 on a position and I'd be genuinely upset watching it turn into a $200 loss, that's a $1,000 swing I need to protect against. If the stock is at $110 and a $10 move lower would trigger that pain, I'm looking at $100 strike puts.

Second, I determine how much upside I'm willing to cap. If I believe the stock could reach $130 but I'd be satisfied with $120, that's my short call strike. If I genuinely think it's going to $140 and I'd hate missing that, maybe I sell the $130 call and pay a bit more for protection.

Third, I look at the net cost or credit. If selling the $120 call for $4.00 and buying the $100 put for $3.50 creates a $0.50 credit, I've added protection for free. That's attractive. If the combination costs $2.00, I need to decide if $200 is worth the peace of mind.

There's no formula here. It's about matching strikes to your actual beliefs and risk tolerance for this specific position at this specific moment.

Time Horizon: When Protection Expires Matters

One subtlety that catches people: your protective collar doesn't need to last as long as your LEAPS.

If you've got eight months remaining on your LEAPS call and you're worried about the next 60 days because of earnings or Fed meetings or election uncertainty, buy a 60-day collar. When it expires, reassess. Maybe the concern has passed and you don't renew protection. Maybe you roll it forward another 60 days.

This creates flexibility. You're not committing to capped upside for the full eight months. You're making a tactical decision about the next two months.

Shorter-dated collars also let you adjust strikes as the stock moves. If you collar at $100/$120 today and the stock runs to $125 in 45 days, you can let the collar expire and establish a new one at $115/$135, moving your protection and cap higher as the stock advances.

The ongoing PMCC short calls you're already selling operate on their own cycle—typically 30-45 days. The protective collar can operate on a completely separate timeline, tailored to the specific risk you're managing.

Managing the Position Going Forward

Once you've established the collar, you're managing multiple moving parts simultaneously.

You've got your original LEAPS call. You've got the protective put. You've got the collar's short call capping your upside. And you've probably still got your regular PMCC short call selling strategy running.

Wait—can you do both? Can you sell short calls as part of your PMCC strategy while also having a short call as part of your collar?

Yes, but you need to think carefully about strikes. Your PMCC short calls should be struck inside your collar's short call. If your collar caps you at $120, your weekly or monthly PMCC calls might be struck at $112, $114, $116 as the stock moves. They expire before your collar, so there's no conflict.

What you cannot do is sell a PMCC short call above your collar's short call strike. If your collar caps you at $120 and you sell a $125 call for your PMCC, you've created undefined risk. Don't do that.

As the stock moves, you'll need to make decisions. If it drops near your protective put strike, do you roll the put lower to maintain protection? That costs money. If it rises near your collar's short call, do you roll that call higher to capture more upside? That might require additional premium.

These aren't things you can plan in advance. They're tactical responses to price action, and they require judgment.

The Psychological Component Nobody Talks About

Here's something I've observed over two decades: adding protection to a winning position often signals that you've made enough money to change how you feel about the trade.

That's not weakness. That's honesty.

When you first established the PMCC, you were comfortable with the risk because you had nothing to lose. Now you've got profits, and losing them feels different than never having made them at all. Behavioral finance calls this the "disposition effect", we feel losses more acutely than equivalent gains.

The collar acknowledges this psychological reality. It says: I still believe in this trade, but I'm now playing with the house's money and I'd like to keep some of it.

There's absolutely nothing wrong with that. In fact, it's one of the more mature approaches to position management I see.

The alternative, holding without protection because you "should" be comfortable with the risk, leads to stress, poor decisions, and eventually revenge trading when the position does give back profits.

Better to collar it, sleep well, and let your thesis continue developing within defined boundaries.

When to Skip the Collar Entirely

Not every PMCC needs protection, and not every moment of uncertainty justifies the cost and complexity of a collar.

If you've got minimal gains and you still believe strongly in the upside, adding a collar might just lock in mediocre returns. Let it run.

If implied volatility is extremely low and puts are cheap while calls are worthless, you can't finance protection effectively. Either pay for the put outright or skip it.

If you're close to your intended exit anyway, maybe you were planning to close in 30 days regardless, adding a collar for such a short window rarely makes sense. Just close the position or accept the risk for one more month.

And if you've already collected so much premium through your PMCC strategy that your cost basis is near zero or negative, you're effectively playing with free money. Protection becomes less urgent when you can't actually lose.

What This Really Accomplishes

The collar on a PMCC position does something specific: it converts open-ended directional exposure into a defined-range trade while preserving the capital efficiency that made the PMCC attractive in the first place.

You're still controlling 100 shares with a fraction of the capital required to own them. You're still generating premium from selling calls. But you've eliminated the nightmare scenario where the stock collapses and your LEAPS call becomes worthless.

You've also accepted that you won't capture a moonshot move beyond your short call strike. That's the deal. Defined risk requires defined reward.

Whether that tradeoff makes sense depends entirely on where you are in the trade, what the market is doing, and how you're sleeping at night.

If you find yourself checking the position obsessively, or if the thought of a 15% pullback makes your stomach turn, the collar is probably worth considering. If you're genuinely comfortable with the risk and you'd be fine watching profits shrink temporarily, save the transaction costs and complexity.

The Bottom Line

The LEAPS collar on an existing PMCC isn't a strategy you learn and then apply robotically. It's a tactical adjustment you make when specific circumstances, profitable positions, elevated uncertainty, upcoming events, create a mismatch between your exposure and your comfort level.

Done properly, it lets you stay in a trade you believe in while removing the anxiety that leads to premature exits or frozen decision-making.

Done poorly, it locks in mediocre gains while capping upside you would have captured if you'd just held on.

The difference comes down to honest self-assessment about what you actually believe will happen, how much risk you can genuinely tolerate, and whether the cost of protection is worth the peace of mind it provides.

There's no shame in admitting you've made enough money that losing it would hurt. The collar is simply a tool for acknowledging that reality while staying in the game.

Use it when it fits. Skip it when it doesn't. And always, always run the numbers before you put the trade on.

Probabilities over predictions,

Andy

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Disclaimer: This is educational content only. Not investment advice. Options involve risk and aren't suitable for all investors. Examples are illustrative. Real results will vary. Talk to professionals before you risk real money.