How a Protective Collar Options Strategy Works?

DORIAN TRADER

How a Protective Collar Options Strategy Works ?

When markets swing wildly, many traders feel the urge to back away. Volatility often creates fear — but for disciplined traders, it can also create opportunity. One powerful way to stay protected while still earning consistent returns is through the Protective Collar strategy.

This method, widely used by professional traders like those at Dorian Trader, allows you to hedge your downside while still generating steady income.

Understanding the Protective Collar Strategy

A protective collar consists of three components:

1	A long position in the underlying asset,
2	A long put to protect the downside,
3	A short call to collect premium and offset the cost of the put.

This combination creates a “collar” around your position — limiting both your losses and your upside.

In essence, it’s a covered call plus a protective put, designed for traders who want safety and consistency

How It Works in Practice on /ES ?

Let’s understand how a protective collar can be constructed using a historical example from options on /ES.

Imagine the ES (E-mini S&P 500) is currently trading around 6,372.

You believe the market may climb toward 6,400 over the next seven days.

Here’s how you could build your collar:

Step 1

Buy 1 ES future contract at 6,372.

Step 2

Sell 1 call option at the 6,400 strike to collect about $500 in premium.

Step 3

Buy 1 put option around the 6,295–6,300 strike (cost roughly 10 points less than the call).

This setup limits both your potential loss and your maximum profit — but keeps your capital protected.

Calculating the Potential Profit and Risk

Each ES point = $50.

Upside:
The difference between the call strike (6,400) and current price (6,372) = 28 points
→ 28 × $50 = $1,400 potential gain
Add $500 premium = $1,900 total potential profit in a week.

Downside:
If the market falls to 6,295, that’s 77 points lower
→ 77 × $50 = $3,850 unrealized drawdown.

However, that downside is protected by the long put. Even if the market drops 20%–50%, your put option caps the loss. You remain safely “collared” inside a defined range — no surprises.

Why Use the ES Instead of the SPY

The /ES offers several major advantages for active traders:

Tax benefits: 60% long-term and 40% short-term treatment under Section 1256.

No wash sale rule — clean and simple accounting.

24-hour trading access — perfect if you have a day job or trade at night.

Efficient capital usage: You can run this strategy comfortably with around $25,000, though some traders start with less.

Meanwhile, the SPY requires portfolio margin and a much larger account (often over $125,000), making it less accessible for many retail traders.

When to Use the Protective Collar

A protective collar shines in uncertain or sideways markets, when you want to:

Protect existing gains without selling your position.

Generate consistent income from option premiums.

Sleep peacefully knowing your downside is hedged.

It’s less ideal during strong bull markets, where prices may skyrocket and your short call could cap your profit. But for steady, risk-managed growth, it’s one of the most balanced strategies available.

The Protective Collar Strategy is not about chasing the market — it’s about controlling risk while staying invested.
If you’re looking for a practical, mechanical way to trade the S&P 500 without emotional swings, this approach can help you trade confidently through volatility.

To see this strategy step by step in action, check out the Collar Strategy tutorials series on the Dorian Trader YouTube channel. You’ll learn how to build, adjust, and manage trades in real time — from entry to exit — with detailed visuals and clear explanations.

Elevate your trading discipline with Dorian Trader — where strategies like the Protective Collar turn volatility into opportunity. Watch the Collar Strategy Series and start trading smarter today.

DORIAN TRADER