Making money in the market feels good. Keeping those profits is where many investors fall short.
A stock can climb for months — even years — and then give it all back in a matter of weeks. And the biggest mistake isn’t picking the wrong stock… it’s doing nothing when risk starts rising.
In his latest explainer for our YouTube channel, Barchart contributor and options expert Rick Orford shows how traders can protect their investment gains before market volatility hits. It’s all based on an options strategy that can limit downside and even generate income at the same time.
The Problem: Gains Are Easy to Lose
Most investors ride a stock higher and assume the hard part is over.
But once volatility picks up, everything changes:
- One sharp drop can erase months of gains
- Market events can trigger fast downside moves
- Holding without protection becomes a risk
This is where many investors panic and freeze. They don’t necessarily want to sell, but they also don’t want to lose what they’ve made.
That’s the exact scenario the protective collar is built for.
What a Protective Collar Actually Does
A protective collar is a simple but powerful structure:
You own at least 100 shares of stock, and then:
- You buy a put option, which creates downside protection (and creates a floor for losses)
- You sell a call, which generates income (and creates a ceiling for profits)
The result?
- You limit how much you can lose
- You reduce — or eliminate — the cost of protection by selling the call
- In some cases, you can actually get paid to hedge
The Trade-Off (The Most Important Part)
There’s no such thing as a free trade. With a collar, the put protects your downside… but the call caps your upside.
You’re essentially saying: “I’m willing to give up some potential upside in order to protect what I already made.”
And for many investors — especially after a strong bull run — that’s a trade-off worth making, especially when risk factors are running high.
Example: Locking In Gains on Microsoft
Let’s say you bought shares around $300. The stock ran up to $500, but now it’s pulled back near $400.
You’re still green on the trade, but risk is increasing.
Here’s how a hypothetical MSFT collar might work:
- Buy a $395 put to lock in profits and limit risk
- Sell a $420 call to generate income
In this example:
- You collect a small credit
- You’re protected below $395
- You’re capped above $420
Through the expiration date of the options, you’ve defined your risk and your potential outcomes, no matter what happens.
What Happens Next
This is where the strategy becomes powerful, because everything from here is predetermined by your strike prices.
If the stock stays between $395–$420:
- Both options expire worthless
- You keep your shares
- You keep the net credit as your profit
If the stock drops hard:
- Your put increases in value
- You can sell to close or exercise shares
- Your risk is defined and profits locked in
If the stock rips higher:
- Your shares get called away at $420
- You lock in profits, but give up further upside
- Can use gains to repurchase shares (Cash-Secured Put)
When This Strategy Makes the Most Sense
Protective collars aren’t for every situation — they’re for specific conditions:
- You have large unrealized gains
- You expect stock-specific volatility or macro-level uncertainty that could move shares
- You want to hold shares without selling
This is especially relevant during:
- Earnings season
- High-stakes Fed meetings
- Rising geopolitical risk
The Risk Most Traders Ignore
A common misconception with collars is that the high win rate translates to “low risk.” As with any options selling strategy, that’s not true. With collars, upside is capped, and position sizing still matters.
And, like all types of insurance, protection isn’t free. You’re either paying in premium, or in opportunity.
The Bottom Line
The biggest mistake investors make isn’t buying the wrong stock. It’s letting a winning position turn into a losing one.
Protective collars give you a way to:
- Stay in the trade
- Lock in gains
- Reduce downside risk
And sometimes, even get paid to do it.
Stream Rick’s full video on Protecting Your Profits:
Then, build your trade using the Protective Collar Screener >>
