One of my favorite strategies is called a "collar," and it's pretty much what it sounds like – using your head by not sticking out your neck. A collar trade is a spread strategy that helps you to preserve profits on a stock that's made some significant gains.

Because we're looking to buy protection, we're buying put options as the first half of the trade. But the second half of the trade (as a spread is a two-legged trade) encompasses selling call options against those long puts. Both options should be out-of-the-money, so that means the market price of the stock should be lower than the put option's strike and higher for the call option's strike.

For example, a stock that keeps on moving upward is Apple (AAPL). To "collar" a 1,000-share position in AAPL, which is trading at $181, you could:

• Buy 10 AAPL Jan (2009) 180 Puts, and
• Sell 10 AAPL Jan (2008) 195 Calls

Notice that I went all the way out into 2009 for the January puts at the $180 strike price. Not only does the long put position protect us from a downward move as AAPL moves up, but it does so for a year.

When we're simply buying options, particularly calls, we're usually looking to profit from a quick move in the near term. But when we're buying protection, it makes sense to buy as much time as we can!

Get 'Sold' on the Idea of Selling Calls Against Your Puts

That brings me to the call options that we will sell to open. Those calls at the $195 strike represent the share price we want to ride AAPL up to.

Notice that we've gone with calls that have a closer expiration date. The goal with the collar strategy is to collect premium from those short calls every month or so as you're riding this trade till the later expiration date of the puts.

If you were to sell the AAPL Jan 195 Calls today, you could collect $10.80 a share ($1,080 a contract or $10,800 a 10-lot that is "covered" by your thousand-share position in AAPL stock). But here's the magic: If AAPL doesn't trade up to $195 by expiration Friday in January, this is premium that stays in your pocket.

Assuming these out-of-the-money short calls expire out-of-the-money, you keep that money and, once again, sell the calls at that strike price (or higher, if the stock keeps climbing) each month. You might just be pocketing premium again and again!

'Put' the 'Call' of Extra Profits on Your Wish List

But back to those long puts – what you pay to buy those puts should come out of the profits you make on the short calls. Those puts are going for about $34 right now ($3,400 a contract or $34,000 to cover your thousand shares).

That insurance may seem expensive, but look at it this way – you spend $34,000 now to buy those puts, but it's a one-time expenditure. If you spent $180,000 to buy 1,000 shares of AAPL today, that $34,000 looks like a reasonable "life insurance" contract to keep you protected for the next year.

Once you collect that $10,800 on those AAPL Jan 195 Calls, you've started profiting on the collar, as you've brought your investment down to $23,200. Remember, as long as the stock stays above the strike price of the long puts, you will be selling calls against them, and that's money you take in every time you initiate a new trade.

All things being equal in this example, if you took in $10,800 a month during the next 12 months, you could collect $130,000 in that time – a profit of nearly $100,000 after you subtract the initial investment in the long puts. That number could be less or even more, depending on the options' value!

Collars Can Keep Great Investments Alive, Thriving

So, to review, here is what the AAPL collar is designed to achieve:

1. The long-term put provides downside protection with slower time decay.
2. You cap off your upside potential by virtue of the short-term call sale.
3. You could generate monthly income with the sale of out-of-the-money calls. Or, you could buy back the call (between expirations) and roll it up to a higher strike price if the stock moves farther and faster than you had anticipated.

But what would happen if the stock went down? Simple. Those long AAPL Jan (2009) 180 Puts would expire worthless if the stock kept going up, but if shares pulled back to $180 or lower by January 2009 expiration, you could collect the premium that would be available as the put moved in-the-money.

That way, if you lost money on the stock, you could come out better off than you would have been otherwise if your shares dropped and you didn't have any protection in place.

Now, I know some of you might have gotten nervous about the short calls because of the risk of assignment. But remember, you have the shares in your account, so if you were assigned to provide 1,000 shares of AAPL at the $195 strike, you already had the shares in your account, and if you bought them at market ($181, in this example), you'd be paid $195 per share to be taken out of your position – a profit of $14 per share.

And since you were planning on riding the stock up to that level anyway, the work of closing a position might just be done for you!

Jon Najarian is uncovering trading opportunities based on what the "smart money" buyers are doing, with his HeatSeeker finding unusual call-trading activity, and its bearish counterpart, Depth Charge, finding extraordinary amounts of put options changing hands under most investors' radars. Trade alongside the big-money buyers, without the huge financial and time commitments, with ChangeWave Options Trader. Click here to get started.