Quarterly Outlook
Q4 Outlook for Investors: Diversify like it’s 2025 – don’t fall for déjà vu
Jacob Falkencrone
Global Head of Investment Strategy
Investment and Options Strategist
Summary: You’ve made gains, but markets are turning uncertain - should you sell or stay in? This article introduces the collar strategy, a simple options approach that helps protect your investments while keeping costs low and your upside intact
You've done well. You picked strong stocks, stayed invested through ups and downs, and now your portfolio is showing healthy gains. But lately, things feel different. The headlines are turning cautious, markets seem nervous, and there's talk of a potential correction.
This is often what investors experience as volatility—not just fast price swings, but that creeping uncertainty about what comes next. You look at your gains and wonder: Should I lock them in? Should I sell now? But what if the market keeps climbing? And what if it doesn’t—what if everything I built melts away in a downturn?
These are natural questions. And this is where options can help.
Options aren’t just for speculating. At their core, options are contracts that give you flexibility. A call option gives you the right to buy a stock at a fixed price. A put option gives you the right to sell it at a fixed price. And just like you can buy these contracts, you can also sell them—which means you take on an obligation.
These building blocks—calls and puts, rights and obligations—can be combined in many different ways to create what's known as an options strategy. One of the most useful strategies for investors who already own stocks and want protection is called a collar.
In this article, we’ll explain how a collar works, when you might use it, and why it appeals to investors who want to limit losses without giving up on future gains. We’ll walk through a real-world example using an imaginary company: ABC Corp.
Before we get into the details, you might be asking: why not just buy a put option to protect my stocks? That's a fair question.
Buying a put is like buying insurance—it gives you the right to sell your stock at a certain price if things go south. But just like any insurance, it costs money. If you buy a put outright, you’re paying for protection, and that cost can add up. But that cost feels especially painful when markets don’t crash and the protection ends up unused. And yet, in moments like now—when markets look vulnerable—it’s tempting to reach for protection no matter the cost.
That’s where the collar comes in. It’s a way to reduce or even eliminate the cost of that protection.
A collar is an options strategy designed to protect the value of a stock you already own. It uses two option contracts:
The result: your potential losses are capped—and so are your potential gains. It's a way to create a defined range of outcomes, locking in some control while staying invested—while also keeping the cost of protection as low as possible. Think of it like putting a safety net under your investment, but paying for it by agreeing not to jump too high. You’re giving up some extreme upside in exchange for softening the downside—and doing it in a way that doesn’t eat into your returns as much as buying protection outright.
Collars are popular with investors who want to protect gains or ride through uncertain times without panic-selling. Done right, they can be cost-effective and straightforward to manage. And while they do limit your upside, many investors see that as a fair trade-off for peace of mind.
Let’s say you own 100 shares of a fictional company—ABC Corp—and those shares are trading around $303.10. You’ve done well, but you're nervous about a market pullback. You don’t want to sell the shares, but you also don’t want to leave them unprotected. This is where a collar strategy comes in.
You’ve built up a nice gain—but with markets turning jittery, you’re starting to feel uneasy. You don’t want to sell your shares, but you also don’t want to watch your profits vanish in a sharp correction.
Here’s how you might think about protecting that investment.
If your $30,310 position dropped to $28,000, that’s a loss of about $2,310, or roughly 7.5%. Would that make you uncomfortable? Or could you live with that kind of decline? Your answer helps determine the strike price of the put option you'd consider buying.
Are you worried about the next few weeks, the next earnings season, or the next quarter? The longer you want to be protected, the more expensive the put option will be. In this example, we’ll consider a protection window of about 6 to 8 weeks.
Suppose you decide to buy a $280 put option, giving you the right to sell your shares at that level if the market drops. That sets your downside limit. But to help offset the cost of that put, you sell a $330 call option. That means if the stock rises above $330, you’ll be obligated to sell your shares at that price.
This way, you’re giving up some upside—but in return, you reduce or even eliminate the cost of your protection.
This is the basic logic behind a collar strategy: you fund your protection by capping your potential gains.
Important note: The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
So we bought 100 shares of ABC Corp., our fictional company, when it was trading much lower. Today, the stock is worth $303.10 per share, and your total position is valued at around $30,310. Let’s walk through how you’d actually build a collar step-by-step.
⚠️ Important: This only works safely if you already own at least 100 shares.
That’s because the call option you sell gives someone else the right to buy your shares at a fixed price. If you don’t own those shares, you'd have to go buy them at market prices if assigned—possibly at a huge loss. That’s called an uncovered call, and it involves unlimited risk. The collar avoids this by using your existing shares as collateral.
Here’s how the collar setup might look in this case:
By combining these two legs, your collar creates a well-defined range:
Instead of paying for the put out-of-pocket, this setup gives you a net credit of $60—you’re actually being paid to structure this protection.
Visually, the payoff chart shows (see image below):
Managing a collar means checking in occasionally:
Buy-and-hold investors might check once a month. Active traders might adjust weekly.
It’s not complicated, but it does require attention. Think of it like adjusting your thermostat: small tweaks, based on what the market’s doing.
The best time to set up a collar is before things get wild. When markets fall and volatility spikes, buying protection gets more expensive—just like home insurance after a hurricane warning. But it’s never too late to start thinking about downside risk.
A collar won’t eliminate all risk. But it can help you define your worst-case, stay invested with more confidence, and stop second-guessing every market move.
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