SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

The Importance  of Proactive Hedging in Options Trading

Investing in the stock market can be a daunting task for even the most experienced investors. With the constant fluctuations and volatility of the market, it can be difficult to predict the future direction of the market. This is where options trading comes into play.

Options provide investors with the ability to proactively hedge their portfolios against potential market crashes. In this article, we will discuss the importance of being proactively hedged in an options portfolio.


Why to Hedge?

One of the most critical reasons why it is important to be proactively hedged in an options portfolio is that it is too late to hedge once a market crash has already started.

When a market crash occurs, the prices of stocks plummet, and investors suffer significant losses. The time to hedge your portfolio is before the crash occurs, not after. Proactive hedging involves taking steps to protect your portfolio before the market downturn occurs.

Proactive hedging involves purchasing options that will benefit from a market downturn. These options are typically put options, which give the holder the right to sell an underlying asset at a predetermined price.

When the market crashes, the value of these put options increases, offsetting the losses incurred in the underlying stock. Another reason why it is important to be proactively hedged in an options portfolio is that it can help reduce the overall risk of the portfolio.

By purchasing put options, investors are essentially buying insurance against potential market downturns. While the cost of these options can be significant, they can provide a significant return on investment if a market crash occurs. In essence, proactive hedging is a form of risk management that can help protect investors from significant losses.

Furthermore, proactive hedging can also help investors take advantage of market opportunities. When the market is in a downturn, there are often opportunities to purchase stocks at discounted prices. By hedging their portfolios, investors can protect themselves against losses while still having the capital available to take advantage of these opportunities.

The Collar

There is a well known technique used to be proactively hedged while looking to profit. This technique is called the "collar" strategy. 

This strategy involves simultaneously purchasing put options to protect against downside risk while selling call options to generate income. The income generated from selling the call options can be used to finance the purchase of the put options, effectively creating a "collar" around the portfolio.

A collar is a trading strategy that is commonly used to limit the potential loss of an underlying asset while also capping its potential profit. It is created by combining a long position in an asset with a protective put option and a short call option.


While a collar can be an effective way to protect an investor's position in the market, there are several weaknesses to this trade structure. Here are a few examples:

  1. Limited Profit Potential: One of the main weaknesses of a collar is that it limits the potential profit that an investor can make. By using a protective put option and a short call option, the investor is essentially giving up some of their potential gains in exchange for protection against losses. While this may be a smart move in certain market conditions, it can also be a hindrance in others.
  2. Costly to Implement: Another weakness of a collar is that it can be expensive to implement. This is because the investor must pay for both the protective put option and the short call option. Depending on the price of the underlying asset and the specific options being used, this cost can add up quickly.
  3. Requires Active Management: A collar also requires active management in order to be effective. This means that the investor must be constantly monitoring the market and their position in order to make informed decisions about when to adjust the collar. This can be time-consuming and stressful for some investors.

The Alternatives

The collar strategy, while well-known, has some weaknesses that can limit an investor's potential gains and require active management. However, there are lesser-known strategies that can achieve the goal of proactively hedging without these downsides. These advanced techniques involve combining ratio spreads with butterflies and relying on second-order Greeks. As a result, these strategies offer several advantages, including:

  1. Greater Flexibility: These advanced strategies are more flexible than the collar strategy, allowing for more nuanced adjustments to an investor's position in response to changing market conditions.
  2. Lower Cost: These strategies are less expensive to implement than the collar strategy, which can require the purchase of both a protective put option and a short call option.
  3. Potential for Higher Gains: By relying on second-order Greeks and combining ratio spreads with butterflies, these strategies have the potential for higher gains than the collar strategy.
  4. Reduced Need for Active Management: These advanced strategies can require less active management than the collar strategy, which can be a benefit for busy investors or those who prefer a more hands-off approach.

While the collar strategy has its place in certain market conditions, there are advanced options trading strategies that can offer several advantages over the collar strategy. These techniques are worth exploring for investors who are interested in proactively hedging their positions while also maximizing their potential gains.


In conclusion, investing in the stock market can be risky and unpredictable, but options trading can provide a way to proactively hedge against potential market crashes.

Being proactively hedged involves taking steps to protect your portfolio before a market downturn occurs. The collar strategy is a well-known technique used for proactively hedging, but it has some weaknesses that can limit an investor's potential gains and require active management. However, there are advanced options trading strategies that can offer greater flexibility, lower cost, potential for higher gains, and reduced need for active management.

Ultimately, investors should  consider all options trading strategies to find the one that best suits their risk tolerance, investment goals, and market conditions. By proactively hedging their portfolios, investors can reduce their risk exposure, take advantage of market opportunities, and potentially achieve higher returns.

About the Author: Karl Domm's 29+ years in options trading showcases his ability to trade for a living with a proven track record. His journey began as a retail trader, and after struggling for 23 years, he finally achieved 
consistent profitability in 2017 through his own options-only portfolio using quantitative trading strategies.

After he built a proven trading track record, he accepted outside investors. His book, "A Portfolio for All Markets," focuses on option portfolio investing. He earned a BS Degree from Fresno State and currently resides in Clovis, California. You can follow him on YouTube and visit his website real-pl for more insights.


What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles


  • Covered Calls Options Strategy Guide

    Covered calls have always been a popular options strategy. Indeed for many traders, their introduction to options trading is a covered call used to augment income on an existing stock portfolio. But this strategy is more complicated, and riskier, than it looks.

    By Chris Young,

  • How Options Work: Trading Put And Call Options

    Learning how options work is a key skill for any trader or investor wanting to add this to their arsenal of trading weapons. It’s really not possible to trade options well without having a thorough grounding of the mechanics of what these derivatives are and how they work.

    By Chris Young,

  • Protective Put: Defensive Option Strategy Explained

    The protective put (sometimes called a married put) strategy is one of the simplest, but most, popular, ways options are used in the market. Here we look at this defensive strategy and when and how to put it in place. Options provide investors and traders with an extremely versatile tool that can be used under many different scenarios.

    By Chris Young,

  • The Surprising Secret to Proper Portfolio Diversification Revealed

    During a discussion about my trading system, the question arose regarding the ability to exit positions entirely and mitigate substantial drawdowns during a crash-style event. This particular circumstance has caused concern about the effectiveness of the trading method. The common response to such concerns is often centered around the concept of maintaining a properly diversified portfolio.

    By Karl Domm,

  • Options Trading Strategy: Bear Put Spread

    Options can be an extremely useful tool for short-term traders as well as long-term investors. Options can provide investors with a vehicle to bet on market direction or volatility, and may also be used to collect premiums. A long options position is simple to use, and has defined risk parameters.

    By Chris Young,

  • Market Chameleon Trial Offer

    We are pleased to announce that Market Chameleon is offering SteadyOptions members a 2 week free trial for their premium tools. Market Chameleon is a premier provider of options information, using both stock fundamentals data as well as options analytics to provide better insight for those who wish to make informed investment decisions.


    By Kim,

  • Where Should You Be Investing Your Money?

    Everyone should be investing. After all, there’s no better way to increase your retirement savings and boost your spending power than by putting your money to work. Many people believe that investing is something that only wealthy people or financial experts can do, but that’s not the case.

    By Kim,

  • Options Trading Strategy: Bull Call Spread

    The bull call spread is a simple strategy that can be used by novice options traders to bet on higher prices. Options can be an extremely powerful tool in the trading arsenal of those that know how to use them, and long options positions can be used to bet on a market rise or decline, with limited risk and potentially unlimited profit potential.

    By Chris Young,

  • Stock Option Strike (Exercise) Price Explained

    The option strike price (also known as the exercise price) is a term used in options tradingOptions are derivatives. These financial instruments are ‘derived’ from another underlying security such as a stock, and give the right (but not the obligation) to buy or sell the underlying at some point in the future.


    By Chris Young,

  • Mastering the Art of Options Trading: Tips for Small Accounts

    Growing a small trading account with options can be a challenging task, but it is definitely achievable. When I began my journey in trading options, my goal was to double my small account every three months. However, I quickly learned that taking excessive risks without proper risk management would only lead to starting over again and again by adding new funds to my account.

    By Karl Domm,


  Report Article

We want to hear from you!

There are no comments to display.

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

Options Trading Blogs Expertido