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Covered call vs protective put: get paid, or pay for insurance?

Both start with 100 shares you own. A covered call sells someone the right to buy them, so you get paid but give up big gains. A protective put buys the right to sell them, so you pay but set a floor on your loss.

Comparison · 6-minute read · Updated 2026-10-26

The short answer

A covered call means you own 100 shares and sell a Call option. You collect a premium now. In return, your shares may be sold at the strike. Your upside is capped. Your downside is only cushioned by the premium. See Covered call.

A protective put means you own 100 shares and buy a Put option. You pay a premium now. In return, you can sell your shares at the strike, no matter how far the stock falls. Your downside has a floor. Your upside stays open, minus the cost.

One is income from the shares. The other is insurance on them.

Side by side

A worked example (an illustration, not a trade idea)

You own 100 shares of a made-up stock, XYZ, bought at $50. It trades at $50 now. You look at one-month options.

• Covered call: sell the $55 call for $1.00. You collect $100.
• Protective put: buy the $45 put for $1.00. You pay $100.
• Both together (a collar): sell the call and buy the put. The $100 in pays for the $100 out. Net cost: $0.

Read it from top to bottom.

On a crash to $35, the covered call barely helps. You're down $1,400. The protective put stops the loss at $600.

On a flat month, the covered call earns $100. The protective put costs $100. That's the price of insurance you didn't need.

On a big rally to $65, the covered call stops at $600. The protective put keeps almost all of it.

The trade-off in one picture

The two are mirror images.

• The covered call is paid to give up the top of the range.
• The protective put pays to give up the bottom of the range.

Time works in opposite directions too. Every quiet day, the call you sold loses value, which helps you. Every quiet day, the put you bought loses value, which hurts you. See Theta.

What a collar is

Put them together and you get a Collar. You own shares, sell a call above, and buy a put below. The call premium pays for some or all of the put.

The result: your shares can only move inside a band. In the example, from −$500 to +$500. You give up the big win to remove the big loss.

A collar is useful when you want to keep shares through a risky stretch, such as an earnings report, without selling them.

Where each fits with the wheel

The wheel strategy uses covered calls after a put assignment. It accepts stock risk on purpose and gets paid for it. Most wheel sellers don't buy puts; that would cut into the premium they collect.

Some sellers add a protective put only in special cases:

• a big event is coming, and they'd rather not sell the shares,
• the position has grown too large for their account,
• they're holding shares they can't sell yet, for tax or timing reasons.

Our covered call guide shows the call side outcome by outcome.

In Canada, covered calls are widely allowed in a TFSA or RRSP, and buying puts usually is too. Collars depend on the broker. Options permissions differ by broker.

Which should you use?

• Fine with selling at a higher price, and the stock looks calm? A covered call fits.
• Worried about a big drop, and want to keep the upside? A protective put fits, if you accept the cost.
• Want to hold through a scary event, and okay giving up gains? A collar fits.

Whichever you pick, don't treat the premium as free. Sold premium caps your gains. Bought premium is a real cost.

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