Making Money for Risk Averse Investors

Protective Collar Strategy

You want to make money in the stock market but you are a risk-averse investor; and don’t want to expose yourself to the potential of losing all of your money! Well, there’s a strategy for you which I will cover in this article.

If you want to make money in the Options market; but are afraid because of the associated downside associated with it; you can use the Protective Collar Strategy; it can provide protection against short-term losses, allowing you to make money when the market goes up.

making money for risk averse investors
Protective Collar Strategy – forms a collar to limit the downside – making money for risk averse investors.

Let’s say there’s a Stock X

Current Market Price (CMP):                       $180
Premium for 1-month $182 call =             $0.60
Premium for 1-month $176 put =             $0.40

Now, follow the below steps.

  1. Buy 10 shares of Stock X for $1800
  2. Sell 10 call options for $6 and Buy 10 put options for $4; Net Premium earned = $2
  3. At time of expiry:
    • If price remains between $176 and $182 then you’ll earn $2 through the initial premium and keep holding the stock. So you have earned $2 without selling the stock.
    • If the price goes above $182, let’s say $185, call option will be in-the-money (ITM); you’ll have to sell the share for $182 to the option-buyer. Since purchase price of the share was $180, you are in $2 profit per share; and total profit is $20 + $2 (initial premium) = Net profit of $22.
      Important: If the investor didn’t go for a protective collar strategy; then he would make a higher profit in this scenario by simply selling the share for $185; and making a profit of $5 per share i.e. $50 profit. This strategy limits the profit potential for the investor to $22 no matter how high the market goes.
    • If the price goes below $176, let’s say $150; put option will be ITM and you can sell the share to the option-seller at $176. No matter how low the share falls, your loss will be limited; since you can sell the share for $176 through the put option that you bought. Your loss in this case will be $4 per share; so total loss will be $40 – $2 (initial premium) = Net loss of $38.
      Important: If the investor had not gone for a protective collar strategy; then he would incur a higher loss in this scenario; since the share price has gone down by $30 per share i.e. $300 loss. This strategy reduced the maximum loss of the investor to $38 no matter how low the market falls.


Protective Collar Strategy provides investors an opportunity to make money in the market when the market goes up; and at the same time protects them from huge losses in case of a fall in the stock price. Therefore, it’s a good strategy for risk averse investors who want to make money safely.

The downside of this strategy is that along with limiting the maximum loss; it also limits the maximum profit for an investor in case of a bullish market. So, it creates a collar or a boundary within which the investor can make a profit or a loss.

Do check out MKJ sir’s video on this topic at this link!

Read our other blogs here!

9 thoughts on “Making Money for Risk Averse Investors”

  1. Thanks for giving us this strategy , will use it whenever we feel apprehensive about impending markets fall/crash.

  2. Hari Prasad Rout

    Thank you very much giving us a nice strategy but it require more money to invest. Is this strategy use full for equity shares..?

    1. Yes, this can be applied in equity shares. But please take care that trading is a risky business and I would only recommend you to invest that amount of money which you can afford to lose. Thanks for reading! 🙂

  3. Those doing options and then using this strategy, I doesn’t make sense.
    Options is not for risk averse players.
    They should simply be away

    1. You’re correct. In fact, a 100% risk averse person may not even feel safe about keeping his money in a bank’s savings account (after the recent developments in the Indian Banking System – Yes Bank, PMC Bank, etc.).
      But, nothing is so black and white, and everyone’s risk acceptance criteria is different. There are people who want to enter into options trading but want to start with one of the safer strategies within that. I sincerely hope this article was able to help some of those people. 🙂

      Thanks for your input!

Leave a Comment

Your email address will not be published. Required fields are marked *