Strategies for Protection: Protective Puts and Collars

11.1 Node's dilemma

Node had built a meaningful bitcoin position over the years and planned to hold it long-term. But a combination of high prices, crowded leverage (Module 7, Chapter 9), and an upcoming event made Node nervous.

"I want protection for the next month," said Node. "But $2,251 for a put feels expensive if nothing happens. Is there a cheaper way?"

"There is," said Hash. "You can pay for your insurance by giving up some of your upside. Let's compare the options."

11.2 The protective put, revisited

From Chapter 3: Node holds 1 BTC at $100,000 and buys a 30-day $90,000 put for $2,251.

	Value
Floor	$90,000
Maximum loss	$12,251 ($10,000 to the strike, plus premium)
Upside	Unlimited, minus $2,251
Cost	$2,251, about 2.3% of the holding for one month

Protective puts are simple and effective. Their main drawback is cost, especially when repeated. Buying similar protection every month for a year could cost a large share of the holding, especially when implied volatility is high (Chapter 6).

Chapter 11 · The protective put

Holding 1 BTC gives unlimited upside and downside. Adding a put option sets a floor at the strike: below it, the put gains offset further losses, capping the worst case. Above the strike the position keeps rising, reduced only by the premium paid for the put.

11.3 Choosing the strike and expiry

Choice	Effect
Strike closer to the current price	More protection, higher cost
Strike further below	Cheaper, but only protects against larger falls
Shorter expiry	Cheaper upfront, but faster time decay and needs frequent renewal
Longer expiry	More expensive upfront, but cheaper per day of protection (Chapter 5)

Many holders choose puts 10% to 20% below the current price, similar to choosing a deductible on insurance. They accept smaller declines and protect against severe ones.

11.4 The collar

A collar combines two options with a holding:

1. Buy a put below the current price, for protection.
2. Sell a call above the current price, to collect premium that pays for the put.

The result: a floor below, and a cap above.

Node holds 1 BTC at $100,000:

Leg	Strike	Premium
Buy 30-day put	$90,000	Pay $2,251
Sell 30-day call	$110,000	Receive $2,765
Net		Receive $514

In this example, the collar actually pays Node a small amount, because the call sold is worth more than the put bought. That credit comes from the flat 55% implied volatility used throughout this module, where the $110,000 call happens to price higher than the $90,000 put. In real markets, the result depends on skew (Chapter 9): when put skew is steep, downside puts are expensive and collars often cost something; when call skew is steep, they can pay.

11.5 Collar outcomes

BTC at expiry	1 BTC value	Put value	Call obligation	Net premium	Total	Change
$60,000	$60,000	+$30,000	$0	+$514	$90,514	−$9,486
$90,000	$90,000	$0	$0	+$514	$90,514	−$9,486
$100,000	$100,000	$0	$0	+$514	$100,514	+$514
$110,000	$110,000	$0	$0	+$514	$110,514	+$10,514
$130,000	$130,000	$0	−$20,000	+$514	$110,514	+$10,514

Node's outcome is locked between about $90,500 and $110,500 for the month, regardless of how wildly bitcoin moves.

"So I traded away gains above $110,000 to get free protection below $90,000," said Node.

"Exactly," said Hash. "A collar is a deliberate trade: you give up the best outcomes to remove the worst."

11.6 Comparing protection methods

Method	Upfront cost	Downside	Upside	Management
No protection	None	Fully exposed	Unlimited	None
Protective put ($90,000)	~$2,251	Floor at $90,000	Unlimited, minus premium	Simple
Collar ($90,000 / $110,000)	~$514 credit	Floor at $90,000	Capped at $110,000	Simple
Short perp hedge (Module 7, Chapter 12)	Fees and margin	Reduced proportionally	Reduced proportionally	Margin monitoring; liquidation risk
Selling some holdings	Fees and possibly taxes	Reduced	Reduced	Simple, but loses position

11.7 Things to watch

Capped upside is real. If bitcoin surges 30% during the month, the collar holder misses most of it. Some holders regret collars precisely when the market rallies hard.

Call assignment with cash settlement. Because most crypto options are cash-settled, if the short call ends in the money, Node pays the difference in cash or coin, and keeps the bitcoin. Node needs enough liquidity to cover that, or must sell some BTC.

Margin on the short call. The sold call may require margin on some venues, unless the venue recognises the holding as cover. Check how your venue handles this.

Taxes. Options gains, losses, and premiums may be taxed differently from the underlying holding, depending on your country (Module 14).

Liquidity and spreads. Far-from-the-money options can have wide bid-ask spreads (Chapter 10), which add to the real cost.

11.8 Node's choice

Node chose a collar for the month before the event, with a $90,000 put and a $110,000 call. Bitcoin fell 12% after the announcement, then partially recovered, ending at $93,000.

	Value
Without protection	−$7,000
With the collar	−$6,486 at expiry

"I didn't avoid all losses," said Node. "But for the whole month, I knew exactly the worst case. That was worth it."

11.9 Try it yourself

Using today's BTC options chain, build a 30-day protective put and a 30-day collar on 1 BTC, using strikes roughly 10% below and 10% above the current price. Calculate the net cost of each, the floor, and the cap. Then calculate the outcome of each at expiry if BTC ends 25% lower, flat, or 25% higher.

Key takeaways from this chapter

1. Protective puts create a floor under a holding while keeping upside, at the cost of the premium.
2. Strike and expiry choices trade off protection against cost, like insurance deductibles.
3. A collar buys a put and sells a call, using the call premium to pay for protection.
4. Collars lock outcomes within a range, giving up gains above the call strike.
5. Skew determines whether a collar costs money or pays a small credit.
6. Watch for capped upside, cash settlement of the short call, margin requirements, taxes, and spreads.
7. Protection is a deliberate trade-off. Choose the method that matches your goals and time horizon.