What Is a Protective Collar?

By Matthew DiLallo – Updated Apr 17, 2025 at 12:08 AM

Key Points

Protective collars limit downside risk and control costs by using put options funded by selling calls.
The strategy risks limiting profit if a stock's price rises beyond the call's strike price.
Used strategically, protective collars shield investors from sudden price drops in volatile markets.

A protective collar, or costless collar, is a defensive options trading strategy aimed at protecting an investor against losses from a significant decline in an underlying stock's price. The strategy involves buying a put option that an investor funds by simultaneously writing a covered call on the underlying stock. Investors can often execute a protective collar trade with little to no out-of-pocket cost.

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Instead of selling their stocks, they put a protective collar on some of their largest positions, including Apple (AAPL -1.66%). Shares of the tech titan were trading at around $170 at the time. They want to protect their downside below $160 per share. They can set up a $180/$160 protective collar expiring in four months for virtually no cost since they can buy puts for around $5 per share while selling calls for about the same price.

If shares tumble, the investor can sell the $160 put to help cushion the blow. However, if shares soar past $180, the investor must pay money to cover their short call (or try to roll it forward) or risk having shares called away.

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About the Author

Matt DiLallo has been a contributing Motley Fool stock market analyst specializing in covering dividend-paying companies, particularly in the energy and REIT sectors, since 2012. He also covers pre-IPO companies, ETFs, and other investing topics. He holds an MBA from Liberty University.

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Matt DiLallo has positions in Apple and has the following options: short May 2025 $275 calls on Apple. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.