Investing in the stock market can be both rewarding and risky. While the potential for growth is significant, the fear of market losses often deters investors from fully committing to their portfolios. However, there is a strategy that allows you to grow your portfolio with the markets while guaranteeing that you avoid any significant losses—and it doesn’t require expensive financial products like annuities or life insurance. This strategy involves using options, specifically a collar strategy, which combines a protective put and a covered call. Let’s break it down.
What is a Collar Strategy?
A collar strategy is an options trading strategy that involves three key components:
- Long Exposure (Owning Stocks or ETFs):
This means you own shares of a stock or an ETF, such as the S&P 500 (SPY), NASDAQ 100 (QQQ), or Russell 2000 (IWM). For simplicity, this strategy works best with indexed ETFs. - Protective Put Option:
A protective put is an insurance policy for your portfolio. You purchase a put option at a specific strike price, which guarantees that if the market drops below that price, you won’t lose any additional value. For example, if the ETF is trading at 500,youcanbuyaputoptionat500,youcanbuyaputoptionat500. If the price falls below $500, the put option will offset your losses. - Covered Call Option:
A covered call involves selling a call option at a specific strike price. This allows you to collect premium income upfront but caps your potential growth. For example, if the ETF is trading at 500,youmightsellacalloptionat500,youmightsellacalloptionat520. If the price rises above $520, you won’t participate in any additional gains beyond that point.
When combined, the protective put and covered call create a “collar” around your portfolio, limiting both your downside risk and upside potential.
How Does the Collar Strategy Work?
The collar strategy works by balancing the cost of the protective put with the income from the covered call. Ideally, you structure the trade so that the premium you receive from selling the covered call offsets the cost of buying the protective put. This means the strategy can be implemented at little to no net cost.
Here’s a step-by-step breakdown:
- Buy Shares of an ETF:
For example, let’s say you buy 100 shares of the S&P 500 ETF (SPY) at $610 per share. - Buy a Protective Put:
Purchase a put option at a strike price of 610,whichcosts610,whichcosts2,770. This ensures that if the market drops below $610, your losses are capped. - Sell a Covered Call:
Sell a call option at a strike price of 640,whichgenerates640,whichgenerates2,770 in premium income. This offsets the cost of the protective put, making the trade cost-neutral. - Outcome Scenarios:
- Market Drops: If the market falls below $610, the protective put kicks in, and your losses are limited.
- Market Rises: If the market rises, you participate in growth up to 640.Anygainsbeyond640.Anygainsbeyond640 are capped.
- Market Stays Flat: If the market stays between 610and610and640, you keep the premium income from the covered call.
Historical Example: S&P 500 (2021-2022)
Let’s look at a real-world example to see how this strategy works in practice. In December 2021, the S&P 500 (SPY) was trading at 477.18.Ifyouhadpurchasedaprotectiveputat477.18.Ifyouhadpurchasedaprotectiveputat475, it would have cost 3,695.FastforwardtoDecember2022,whenthemarketdroppedsignificantly,theputoptionwouldhaveincreasedinvalueto3,695.FastforwardtoDecember2022,whenthemarketdroppedsignificantly,theputoptionwouldhaveincreasedinvalueto9,150, offsetting your portfolio losses. By combining this with a covered call, you could have structured the trade to be cost-neutral, ensuring no net loss.
Real-Life Examples in 2025
Let’s explore how you can implement this strategy today using the S&P 500 (SPY) and NASDAQ 100 (QQQ) as examples.
Example 1: S&P 500 (SPY)
- Current Price: $610
- Protective Put (610 Strike): Costs $2,770
- Covered Call (640 Strike): Generates $2,770
- Net Cost: $0
- Growth Cap: 4.92% (from 610to610to640)
Example 2: NASDAQ 100 (QQQ)
- Current Price: $538
- Protective Put (538 Strike): Costs $3,240
- Covered Call (569 Strike): Generates $3,245
- Net Cost: $5 (credit)
- Growth Cap: 5.76% (from 538to538to569)
Adjusting for Risk Tolerance
If you’re comfortable with a 5% loss, you can lower the strike price of your protective put, which reduces its cost and allows you to set a higher growth cap. For example:
- S&P 500 (SPY):
- Protective Put (580 Strike): Costs $1,977
- Covered Call (655 Strike): Generates $1,920
- Net Cost: $57
- Growth Cap: 7.38% (from 610to610to655)
- NASDAQ 100 (QQQ):
- Protective Put (511 Strike): Costs $2,375
- Covered Call (590 Strike): Generates $2,300
- Net Cost: $75
- Growth Cap: 9.66% (from 538to538to590)
Pros and Cons of the Collar Strategy
Pros:
- Downside Protection: Guarantees you won’t lose money beyond a certain point.
- Cost-Neutral: Can be structured so that the cost of the protective put is offset by the income from the covered call.
- Peace of Mind: Ideal for retirees or risk-averse investors who want to protect their portfolios from major market downturns.
Cons:
- Capped Growth: Limits your upside potential, which may not be ideal for younger investors in the accumulation phase.
- Requires Active Management: You need to set up the trade annually, which takes some time and effort.
Who Should Use This Strategy?
The collar strategy is best suited for:
- Retirees or Near-Retirees: Those who want to protect their portfolios from significant losses while still participating in moderate market growth.
- Risk-Averse Investors: Individuals who prioritize capital preservation over aggressive growth.
- Investors with Large Windfalls: Those who have recently come into a large sum of money and want to protect it while earning modest returns.
For younger investors with a longer time horizon, this strategy may not be ideal, as the capped growth could limit long-term compounding potential.
Final Thoughts
The collar strategy is a powerful tool for investors who want to grow their portfolios while avoiding significant market losses. By combining a protective put and a covered call, you can create a cost-neutral trade that provides peace of mind and moderate growth potential. While it may not be suitable for everyone, it’s an excellent option for those who prioritize capital preservation and stability.
If you’re interested in learning more about this strategy or how to use options to enhance your investment portfolio, consider joining a community of like-minded investors or exploring educational resources on options trading. Happy investing!
if we used tis statagy for the last ten years what would our returns be
To estimate the returns of the collar strategy over the last 10 years, we need to analyze how this strategy would have performed in different market conditions. The collar strategy involves:
- Owning the underlying asset (e.g., an S&P 500 ETF like SPY).
- Buying a protective put to limit downside risk.
- Selling a covered call to generate income and offset the cost of the put.
The returns of this strategy depend on:
- The performance of the underlying asset (e.g., SPY).
- The cost of the protective put.
- The income from the covered call.
- The frequency of rebalancing (e.g., annually).
Let’s break this down step by step.
Step 1: Historical Market Performance (2013–2023)
The S&P 500 (SPY) has experienced significant growth over the last decade, with some notable downturns (e.g., COVID-19 crash in 2020). Here’s a rough breakdown of annual returns for SPY:
| Year | SPY Return |
|---|---|
| 2013 | +29.6% |
| 2014 | +11.4% |
| 2015 | -0.7% |
| 2016 | +9.5% |
| 2017 | +19.4% |
| 2018 | -6.2% |
| 2019 | +28.9% |
| 2020 | +16.3% |
| 2021 | +26.9% |
| 2022 | -19.4% |
| 2023 | +24.2% |
Cumulative Return (2013–2023):
If you had simply held SPY, your cumulative return would have been approximately +250% (without dividends).
Step 2: Collar Strategy Assumptions
To estimate the collar strategy’s returns, we’ll make the following assumptions:
- Protective Put: Purchased annually at 5% below the current price (e.g., if SPY is at 400,theputstrikeis400,theputstrikeis380).
- Covered Call: Sold annually at 5% above the current price (e.g., if SPY is at 400,thecallstrikeis400,thecallstrikeis420).
- Net Cost: The premium received from the covered call offsets the cost of the protective put, making the trade cost-neutral.
- Growth Cap: The strategy caps growth at 5% annually (the difference between the current price and the call strike).
- Downside Protection: Losses are limited to 5% annually (the difference between the current price and the put strike).
Step 3: Simulating the Collar Strategy (2013–2023)
Let’s simulate the collar strategy year by year:
| Year | SPY Return | Collar Strategy Return (Capped at 5%) | Notes |
|---|---|---|---|
| 2013 | +29.6% | +5% | Capped at 5% due to covered call. |
| 2014 | +11.4% | +5% | Capped at 5%. |
| 2015 | -0.7% | -0.7% | No loss protection needed (market didn’t drop 5%). |
| 2016 | +9.5% | +5% | Capped at 5%. |
| 2017 | +19.4% | +5% | Capped at 5%. |
| 2018 | -6.2% | -5% | Losses limited to 5% due to protective put. |
| 2019 | +28.9% | +5% | Capped at 5%. |
| 2020 | +16.3% | +5% | Capped at 5%. |
| 2021 | +26.9% | +5% | Capped at 5%. |
| 2022 | -19.4% | -5% | Losses limited to 5% due to protective put. |
| 2023 | +24.2% | +5% | Capped at 5%. |
Step 4: Cumulative Returns
Using the collar strategy, your annual returns would have been capped at +5% in up years and limited to -5% in down years. Here’s the cumulative return calculation:
- Collar Strategy Annual Returns:
+5%, +5%, -0.7%, +5%, +5%, -5%, +5%, +5%, +5%, -5%, +5% - Cumulative Return (2013–2023):
Using compound annual growth rate (CAGR) formula:CAGR=(∏i=1n(1+ri))1n−1CAGR=(i=1∏n(1+ri))n1−1Where riri is the annual return.Plugging in the numbers:CAGR=((1.05)9×(0.993)×(0.95)2)111−1≈2.5%CAGR=((1.05)9×(0.993)×(0.95)2)111−1≈2.5%Cumulative Return: Approximately +31% over 10 years.
Step 5: Comparison with Buy-and-Hold
- Buy-and-Hold (SPY): +250% cumulative return (2013–2023).
- Collar Strategy: +31% cumulative return (2013–2023).
The collar strategy significantly underperforms buy-and-hold in a strong bull market like the last decade. However, it provides downside protection, which could be valuable in a bear market or for risk-averse investors.
Key Takeaways
- Collar Strategy in Bull Markets:
The collar strategy underperforms buy-and-hold in strong bull markets because it caps your upside potential. Over the last decade, this would have resulted in significantly lower returns. - Collar Strategy in Bear Markets:
The strategy shines in bear markets or volatile periods, as it limits losses. For example, in 2018 and 2022, the collar strategy would have limited losses to 5%, compared to -6.2% and -19.4% for buy-and-hold. - Ideal Use Case:
The collar strategy is best suited for risk-averse investors or those nearing retirement who prioritize capital preservation over aggressive growth. - Trade-Off:
The trade-off for downside protection is reduced upside potential. Over the long term, this can significantly impact compounded returns.
Final Thoughts
If you had used the collar strategy over the last 10 years, your returns would have been much lower than simply holding the S&P 500. However, the strategy would have provided peace of mind during market downturns. For younger investors with a long time horizon, the buy-and-hold approach is generally more effective. For retirees or risk-averse investors, the collar strategy can be a valuable tool to protect against significant losses.
To compare the collar strategy with the T-bill rate, we need to look at the risk-free returns provided by U.S. Treasury bills (T-bills) over the same period (2013–2023). T-bills are considered one of the safest investments, as they are backed by the U.S. government and provide a guaranteed return with no risk of principal loss.
Step 1: Historical T-Bill Rates (2013–2023)
The T-bill rate fluctuates over time based on Federal Reserve policy and economic conditions. Here are the average annual T-bill rates (3-month) for each year:
| Year | Average 3-Month T-Bill Rate |
|---|---|
| 2013 | 0.07% |
| 2014 | 0.05% |
| 2015 | 0.10% |
| 2016 | 0.36% |
| 2017 | 1.01% |
| 2018 | 2.00% |
| 2019 | 2.15% |
| 2020 | 0.38% |
| 2021 | 0.05% |
| 2022 | 1.56% |
| 2023 | 4.50% |
Step 2: Cumulative T-Bill Returns (2013–2023)
To calculate the cumulative return of T-bills over the 10-year period, we’ll assume that the returns are reinvested annually. The formula for cumulative return is:Cumulative Return=∏i=1n(1+ri)−1Cumulative Return=i=1∏n(1+ri)−1
Where riri is the annual T-bill rate.
Plugging in the numbers:Cumulative Return=(1.0007)×(1.0005)×(1.0010)×(1.0036)×(1.0101)×(1.0200)×(1.0215)×(1.0038)×(1.0005)×(1.0156)×(1.0450)−1Cumulative Return=(1.0007)×(1.0005)×(1.0010)×(1.0036)×(1.0101)×(1.0200)×(1.0215)×(1.0038)×(1.0005)×(1.0156)×(1.0450)−1
Calculating step by step:Cumulative Return≈1.123−1=12.3%Cumulative Return≈1.123−1=12.3%
So, the cumulative return for T-bills from 2013–2023 is approximately +12.3%.
Step 3: Comparison with Collar Strategy
From the previous analysis, the collar strategy provided a cumulative return of approximately +31% over the same period (2013–2023). Here’s how the two compare:
| Strategy | Cumulative Return (2013–2023) | Risk Level |
|---|---|---|
| Collar Strategy | +31% | Moderate (limited downside) |
| T-Bills | +12.3% | Risk-free (no downside risk) |
Step 4: Key Takeaways
- Collar Strategy vs. T-Bills:
- The collar strategy outperformed T-bills over the last decade, providing +31% vs. +12.3%.
- However, the collar strategy involves market risk (albeit limited), while T-bills are risk-free.
- Risk-Adjusted Returns:
- The collar strategy is a better option for investors willing to take on some risk in exchange for higher returns.
- T-bills are ideal for ultra-conservative investors who prioritize capital preservation over growth.
- Inflation Consideration:
- Over the last decade, inflation averaged around 2% annually.
- T-bills barely kept pace with inflation, while the collar strategy provided real (inflation-adjusted) returns.
- Market Conditions Matter:
- In a strong bull market (like 2013–2023), the collar strategy underperforms buy-and-hold but still beats T-bills.
- In a bear market or volatile period, the collar strategy’s downside protection would make it even more attractive compared to T-bills.
Final Thoughts
- If you’re a risk-averse investor who wants to avoid market volatility entirely, T-bills are a safe choice, but they provide minimal returns that barely outpace inflation.
- If you’re willing to accept some market risk in exchange for higher returns, the collar strategy is a better option, as it provides downside protection while still allowing for moderate growth.
Ultimately, the choice depends on your risk tolerance, investment goals, and time horizon. For retirees or conservative investors, a combination of both strategies (e.g., allocating a portion to T-bills and a portion to a collar strategy) might be a balanced approach.
Let’s walk through an example of how a $10,000 investment would have performed over the last 10 years (2013–2023) using:
- The Collar Strategy
- T-Bills
We’ll compare the final value of the investment under each strategy.
Assumptions
- Collar Strategy:
- Annual return capped at +5% in up years.
- Losses limited to -5% in down years.
- Based on the S&P 500 (SPY) performance.
- T-Bills:
- Annual returns based on historical 3-month T-bill rates.
- Returns are reinvested annually.
- Initial Investment: $10,000.
Step 1: Collar Strategy Performance
Using the annual returns from the collar strategy (as calculated earlier):
| Year | Collar Strategy Return | Investment Value at End of Year |
|---|---|---|
| 2013 | +5% | 10,000×1.05=10,000×1.05=10,500 |
| 2014 | +5% | 10,500×1.05=10,500×1.05=11,025 |
| 2015 | -0.7% | 11,025×0.993=11,025×0.993=10,948 |
| 2016 | +5% | 10,948×1.05=10,948×1.05=11,495 |
| 2017 | +5% | 11,495×1.05=11,495×1.05=12,070 |
| 2018 | -5% | 12,070×0.95=12,070×0.95=11,467 |
| 2019 | +5% | 11,467×1.05=11,467×1.05=12,040 |
| 2020 | +5% | 12,040×1.05=12,040×1.05=12,642 |
| 2021 | +5% | 12,642×1.05=12,642×1.05=13,274 |
| 2022 | -5% | 13,274×0.95=13,274×0.95=12,610 |
| 2023 | +5% | 12,610×1.05=12,610×1.05=13,241 |
Final Value (Collar Strategy): $13,241
Step 2: T-Bill Performance
Using the historical 3-month T-bill rates, we calculate the annual growth of the $10,000 investment:
| Year | T-Bill Rate | Investment Value at End of Year |
|---|---|---|
| 2013 | 0.07% | 10,000×1.0007=10,000×1.0007=10,007 |
| 2014 | 0.05% | 10,007×1.0005=10,007×1.0005=10,012 |
| 2015 | 0.10% | 10,012×1.0010=10,012×1.0010=10,022 |
| 2016 | 0.36% | 10,022×1.0036=10,022×1.0036=10,058 |
| 2017 | 1.01% | 10,058×1.0101=10,058×1.0101=10,160 |
| 2018 | 2.00% | 10,160×1.0200=10,160×1.0200=10,363 |
| 2019 | 2.15% | 10,363×1.0215=10,363×1.0215=10,586 |
| 2020 | 0.38% | 10,586×1.0038=10,586×1.0038=10,626 |
| 2021 | 0.05% | 10,626×1.0005=10,626×1.0005=10,631 |
| 2022 | 1.56% | 10,631×1.0156=10,631×1.0156=10,797 |
| 2023 | 4.50% | 10,797×1.0450=10,797×1.0450=11,283 |
Final Value (T-Bills): $11,283
Step 3: Comparison of Final Values
| Strategy | Final Value (2013–2023) | Growth on $10,000 |
|---|---|---|
| Collar Strategy | $13,241 | +32.4% |
| T-Bills | $11,283 | +12.8% |
Key Takeaways
- Collar Strategy:
- A 10,000investmentwouldhavegrownto∗∗10,000investmentwouldhavegrownto∗∗13,241** over 10 years.
- This represents a +32.4% return, with limited downside risk.
- T-Bills:
- A 10,000investmentwouldhavegrownto∗∗10,000investmentwouldhavegrownto∗∗11,283** over 10 years.
- This represents a +12.8% return, with no risk of loss.
- Difference:
- The collar strategy outperformed T-bills by $1,958 over 10 years.
- However, the collar strategy involves some market risk, while T-bills are risk-free.
Final Thoughts
- If you’re a risk-averse investor who prioritizes safety and is okay with lower returns, T-bills are a good choice.
- If you’re willing to accept some market risk in exchange for higher returns, the collar strategy is a better option.
For example:
- If you had invested 10,000inthe∗∗collarstrategy∗∗,youwouldhave∗∗10,000inthe∗∗collarstrategy∗∗,youwouldhave∗∗13,241** after 10 years.
- If you had invested 10,000in∗∗T−bills∗∗,youwouldhave∗∗10,000in∗∗T−bills∗∗,youwouldhave∗∗11,283** after 10 years.
The choice depends on your risk tolerance and investment goals. A balanced approach (e.g., splitting your investment between the two strategies) could also be a good option for some investors.
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