The PMCC Collar Framework - Building Income with a Floor

Markets don't care about your comfort zone.

You can run a textbook PMCC strategy, solid LEAPS, disciplined short calls, steady income, and still watch a sudden 30% drawdown torch your capital base in a matter of weeks.

That's not a flaw in the strategy. It's the price of admission for selling premium in a world where volatility clusters and tail events happen more often than the models suggest.

The question isn't whether downside risk exists. It's whether you've thought through how much of it you're willing to stomach, and what you're prepared to do about it.

This weekend, we're talking about the PMCC collar, a practical way to add downside protection without gutting the income engine that makes the strategy worth running in the first place.

What You're Actually Protecting Against

Let's be clear about what we're hedging and what we're not.

A 5% pullback? That's noise. A 10% correction? That's part of the deal when you're selling premium on equity instruments.

What you're trying to avoid is the capital-destroying event, the 25%, 30%, 40% drawdown that doesn't bounce back quickly, if at all. The kind of move that turns a well-constructed LEAPS position into an anchor dragging down your entire portfolio.

The PMCC collar doesn't eliminate that risk. It defines it. You're trading unlimited downside for a known worst-case scenario, and you're doing it at a cost that doesn't kill the reason you entered the trade in the first place.

The Structure: Simple, Not Complicated

A PMCC collar is just a standard PMCC with one additional leg:

• Long deep ITM LEAPS call (0.75 to 0.85 delta, low extrinsic)

• Short call (20 to 35 delta, 30 to 60 DTE)

• Long protective put (typically 10 to 20% OTM)

The LEAPS gives you synthetic long exposure. The short call generates income. The put creates a floor.

The trade-off is straightforward: you pay for insurance, which reduces net income, but you cap the catastrophic loss scenario.

If your LEAPS cost $30 and the underlying collapses 40%, you might lose $12 to $15 on the LEAPS without a hedge. With a put at an 80 strike on a 100 stock, your loss stops around $5 to $7 depending on the setup. That's not magic. That's math.

The Cost Problem, And How to Think About It

Insurance isn't free. The question is whether it's worth paying for.

Here's a decent rule of thumb I use: try to keep your annual hedge cost around 1 to 2% of notional exposure, or no more than 25 to 35% of your expected PMCC income.

If you're pulling 8 to 10% annually in call premium and spending 2 to 3% on puts, you're still netting 5 to 7% with a defined risk floor. That's a trade many income-focused traders would take in a heartbeat.

If your hedge cost is eating 60%, 70%, 80% of your income? You've over-hedged. At that point, you're not running an income strategy to you're running a low-return defensive position with extra steps.

And look, I get it. When markets are humming along and everything feels fine, paying for insurance seems like a waste. But the whole point of insurance is that you buy it before you need it, not after the damage is done.

Cheap-Put Frameworks That Actually Work

You don't need expensive, close-to-the-money puts to make this work. Here are three approaches I've found practical over the years:

The OTM Single Put

Buy a put 10–20% below current price, dated to match your short call cycle or extend slightly beyond it. You're not protecting against normal volatility. You're protecting against the move that breaks the trade. This is the cleanest approach if put prices are reasonable.

The Put Spread

Buy a put at 85 to 90% of spot, sell a put at 65 to 75% of spot. You've cut your hedge cost significantly, and you've capped your loss between those two strikes. If the stock goes lower than the short put, you participate in some of that additional loss to but you've already defined the catastrophic zone. This is my preferred method when single puts are too expensive relative to the income I'm generating.

Event-Driven Short-Dated Puts

Earnings, Fed announcements, geopolitical flare-ups to sometimes you just need coverage around a known catalyst. Buy a 2 to 8 week put to bridge the event, finance it with one or two extra call cycles, and remove it once the risk passes. You're not buying year-round insurance. You're buying a seatbelt for the parts of the road where crashes are more likely.

Timing Matters: RSI and IV Rank as Decision Filters

You don't need a collar on every PMCC all the time. That's a great way to slowly erode your returns for no reason.

Think of collars as conditional, you add them when the risk/reward setup makes sense.

Two simple filters I watch:

RSI above 65: The stock is extended. Downside risk is higher than it was a few weeks ago. This doesn't mean a crash is coming, it just means the asymmetry has shifted. When things are stretched, protection tends to make more sense.

IV Rank below 30: Implied volatility is cheap relative to recent history. You're not paying up for insurance. This is when the market is complacent, which is exactly when insurance tends to be most affordable.

If both conditions are true, and you've got a meaningful unrealized gain on your LEAPS, that's a reasonable time to consider protection.

If RSI is already at 30 and IV Rank is at 80, you're buying insurance after the accident. Pass. At that point, the damage is mostly done and you're paying retail prices for protection you should have bought weeks earlier.

Financing the Hedge Without Turning It Into a Gamble

You can offset part of the put cost by adjusting your short call slightly, sell a call a bit closer to the money, or extend the expiration to pick up more premium.

This increases your income and helps cover the hedge, but it comes with a trade-off: you give up a bit more upside if the stock rips higher.

That's fine. You're not running a PMCC to capture lottery tickets. You're running it for durable, repeatable income with defined risk parameters.

The key is discipline. Don't chase every last dollar of credit just to "pay for" the put. Adjust enough to make the math work, not so much that you've turned the trade into a directional bet.

I've seen traders get so focused on "making the hedge free" that they end up selling calls way too close to the money, getting assigned early, and blowing up the whole structure. Don't be that person.

A Practical Example (Conceptual, Not a Recommendation)

Let's say you've got a stock trading at $100.

• LEAPS: Long $70 call, 18 months out

• Short Call: Short $110 call, 45 DTE

• Protective Put: Long $80 put, 4 to 6 months out

Without the put, if the stock drops to $70, your LEAPS might lose $8 to $12 depending on time decay and volatility. That's a real hit to your capital base.

With the put, your loss is capped around $4 to $6, because the put starts offsetting LEAPS losses below $80.

You've defined the worst case. The stock can still move against you, but you know how bad it can get, and you've decided that's an acceptable outcome given the income you're generating on the other side.

This isn't about being right or wrong on direction. It's about knowing your risk and being comfortable with it before you put the trade on.

When to Remove the Collar

Collars aren't permanent. They're situational tools.

I'll remove or reduce the hedge when:

• RSI resets to neutral or oversold (the risk profile has changed)

• IV Rank spikes and puts become very expensive (you're now paying retail for insurance)

• The put has doubled or tripled in value (take the profit and reassess)

• The risk I was worried about has passed (the Fed meeting is over, earnings are behind you, etc.)

The collar is a seatbelt, not a straitjacket. Use it when conditions justify it. Let it go when they don't.

One of the biggest mistakes I see traders make is treating every position the same way, all the time. Markets change. Risk profiles change. Your hedging approach should change with them.

Final Thoughts: Durable Income Beats Heroic Returns

The PMCC works because it's capital-efficient, repeatable, and doesn't require you to be right about direction.

But it only works long-term if you're still around to run it after the next 30% drawdown.

The collar doesn't make your portfolio bulletproof. It makes it durable. It keeps you in the game when others are forced to exit at the worst possible time.

Most days, the hedge doesn't change anything. You're still selling calls, collecting premium, managing the same basic structure you always manage. But when volatility clusters and correlations go to one, you'll be glad you paid a reasonable price for a defined worst-case scenario, especially if it means you can keep running the strategy that's been paying you all along.

Here's how I think about it: the best trade isn't the one with the highest theoretical return. It's the one you can stick with when everyone else is panicking.

That's what the collar gives you, not invincibility, but staying power. And in options trading, staying power is what separates the people who are still here after 20 years from the people who blew up chasing yield in the first bear market they faced.

Trade smart. Stay disciplined. And remember, insurance is only expensive if you never need it.

Probabilities over predictions,

Andy

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Disclaimer: This is educational content only. Not investment, tax, or legal 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.