(FORTUNE Magazine) – Here's a statistic that will put the fear of the market gods in you--especially if your retirement is riding on your company stock holdings. Last year, according to a new study from Watson Wyatt, the total value of "in the money" stock options plummeted more than 50%, from $15.1 billion to $6 billion.

Luckily there are ways to protect yourself. Even if your portfolio is weighted heavily in restricted stock or vested stock options from your employer, you can hedge against a sudden drop in your company's share price--and raise cash immediately to diversify your holdings.

The trick involves using an options strategy called a "cashless collar" or another, slightly funkier derivative known as a "variable share prepaid forward." Yes, as these fabulously opaque names suggest, both have long been redoubts of the ultra-rich. Telecom veteran Craig McCaw, for instance, used a forward to hedge roughly 19.3 million shares of wireless company Nextel. And Ted Turner has used collars on millions of shares of AOL Time Warner (parent of FORTUNE's publisher). These days, however, a growing number of financial institutions--including such bulge-bracket firms as Goldman Sachs, Bank of America, and J.P. Morgan Chase--are marketing them to senior managers, officers, and other execs who are swimming in company stock. (But note: The SEC restricts use of such strategies to those with a minimum net worth of $1 million or earnings of at least $250,000 in the past two years.)

The beauty of collars is that they let you hedge a concentrated stock position without "selling" a single share (right now, that is), so you can defer paying any capital gains tax for years. In the meantime, you stay the beneficial owner of the stock, keep your voting rights, and receive your dividends. The downside is that if the stock zooms far above the price set in your collar, a chunk of that gain goes to somebody else.

A typical transaction involves the pairing of a put option (the right but not the obligation to sell shares at a specified price before a set date) with the selling of a call option--which in this case allows the counterparty to your contract to buy some or all of your shares at a prearranged price. Say you own 20,000 shares of Microsoft. Assuming the stock is now trading at $51, you could buy a put that lets you dump Mr. Softee at a price no more than 10% below the current one, no matter how far the stock eventually falls. (Your strike price, in this example, would be $45.90.) At the same time, you sell options to your brokerage firm or other counterparty that gives it the right to buy the stock for $60.18, which is 118% of the current price. The deal is structured so that the cost of the put is offset by the proceeds of the call, making it in effect "cashless." You will pay brokerage fees, however, which range from 1% to 5% of the total cost of the options contracts.

If the shares are below $45.90 when the put matures, the counterparty pays you the difference between the strike and sale prices. The most you can lose, in other words, is 10%. If the stock soars above $60.18, you owe your counterparty any of the bounty above that price. But here, since your shares would be worth more than what is actually owed, you may not need to sell all of your position--just enough to cover the gain above the strike price. Collars, in fact, are usually settled with a cash payment and not an exchange of shares.

The key, says Richard Zack, managing director at risk-management firm K&Z Partners in New York City, is in setting up the put and call so that they comply with the IRS's somewhat confusing rules for hedging; otherwise, Uncle Sam may treat the collar as a sale and tax any capital gains. So first consult an advisor who specializes in such transactions.

A fancier strategy still is the variable-share prepaid forward. Think of it as a collar bundled with a loan. Unlike a collar, where there is no implied future sale, with a forward you are pledging to sell your shares at a later date--but you get a big perk now. Namely, you can get up to 90% of the current paper value of your shares in cash and use that money to diversify your holdings. The interest rates for this advance, typically around 3% to 5%, are financed into the deal. So for your 20,000 shares of Microsoft, now trading at $51, you might opt for a two-year forward with a strike price of $61.20. With that, your up-front take is a hefty $918,000--or $45.90 (90% of $51) multiplied by 20,000 shares. If the stock soars to $80--sorry, you get just $10.20 of that gain per share. But remember, that's on top of the cash you already received. The counterparty gets the rest of your MSFT shares, valued at $1.3 million. And if the stock were to plummet, you're protected: You'd never owe more than your pledged shares. Everybody's happy.

Collars and forwards may be permissible in your company 401(k) or IRA, so check with your employer and brokerage. They may also be used on vested employee stock options of large companies, but since you don't actually own the stock, you would have to offer some other sort of collateral, says Zack. Also, be sure to understand what happens if you want to unwind the position before maturity. Events like a merger, a stock split, or a substantial increase or decrease in dividends can affect the transaction as well, he says. So know the risks: You don't want a forward to put you two steps back.