Adjusting a costless collar

G

gollybegully

Somebody please explain to me why my understanding of these collars is flawed....

The way I see it, isn't it possible to buy a stock with a very tight stop loss, and if the stock rises just put on a collar and keep adjusting it so it doesn't cap your profit but at the same time prevents losses?

It just sounds too good to be true, I'm sure there's something I'm missing. Aside from commission costs. I'm probably gonna feel dumb when someone explains why it can't be done.
 
Think of a collar as a Bull Vertical Spread.

The Long stock, long Put is a systhetic Call.
and you are selling a higher strike Call against.

Carl
 
Quote from gollybegully:

Somebody please explain to me why my understanding of these collars is flawed....

The way I see it, isn't it possible to buy a stock with a very tight stop loss, and if the stock rises just put on a collar and keep adjusting it so it doesn't cap your profit but at the same time prevents losses?

It just sounds too good to be true, I'm sure there's something I'm missing. Aside from commission costs. I'm probably gonna feel dumb when someone explains why it can't be done.
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when you sell the call to buy the put, you are deciding to cap your profit. And every time you adjust in an adverse condition (ie the call you sold is at a loss) [you sold too early], the put it financed will also be at a loss. If you get enough volatility -both- ways of course, its then a nice situation. you can put on a collar to 'sell the rally', then close both positions on the next dip, rinse and rewash.
 
Quote from scriabinop23:

when you sell the call to buy the put, you are deciding to cap your profit. And every time you adjust in an adverse condition (ie the call you sold is at a loss) [you sold too early], the put it financed will also be at a loss. If you get enough volatility -both- ways of course, its then a nice situation. you can put on a collar to 'sell the rally', then close both positions on the next dip, rinse and rewash.
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OOooh so you're saying if the stock goes up, then I would lose money in order to buy back my call, as well as lose money by closing out the put. Duh, of course.

So unless the underlying rises and then drops, there's no way to "adjust" the position without losing money correct?
 
Quote from gollybegully:

OOooh so you're saying if the stock goes up, then I would lose money in order to buy back my call, as well as lose money by closing out the put. Duh, of course.

So unless the underlying rises and then drops, there's no way to "adjust" the position without losing money correct?
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yep. the other poster's explanation is also good.

It basically turns a 'long stock' position into a 'vertical call spread' position, since:

put + stock = synthetic call.

and call + short call = vertical call spread.
 
Quote from scriabinop23:

yep. the other poster's explanation is also good.

It basically turns a 'long stock' position into a 'vertical call spread' position, since:

put + stock = synthetic call.

and call + short call = vertical call spread.
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Hmm, got it. thanks great info. One more question: is it possible that the gain from the rise in the stock is greater than the loss from closing the collar in "adverse" conditions? or is that a zero sum kinda deal?
 
Quote from gollybegully:

Hmm, got it. thanks great info. One more question: is it possible that the gain from the rise in the stock is greater than the loss from closing the collar in "adverse" conditions? or is that a zero sum kinda deal?
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The entire position is equivalent to a bull vertical spread. It goes up when the stock goes up, but not very much.
 
Quote from gollybegully:

Hmm, got it. thanks great info. One more question: is it possible that the gain from the rise in the stock is greater than the loss from closing the collar in "adverse" conditions? or is that a zero sum kinda deal?
More...
An adjustment worth considering.
(to a Collar or Bull Call Vertical)

If the stock runs up to your Short Call strike.
Sell a Credit Vertical against it. (Bear Call Vertical)
Using the same strikes and expirations that you have.
Creating a 'Box' spread, locking in profit, and let it expire.

Don't give up, keep learning.

Carl
 
Quote from Carl K:

An adjustment worth considering.
(to a Collar or Bull Call Vertical)
More...

Closing the position is kind of stretching the term "adjustment", isn't it?

If the stock runs up to your Short Call strike.
Sell a Credit Vertical against it. (Bear Call Vertical)
Using the same strikes and expirations that you have.
More...

You could probably do better boxing it with puts, since the puts will be OTM and should have narrower bid/ask spreads due to their lower premiums.

Also, check if your broker charges commissions for all the exercises and assignments that will take place to unwind your box at the end of the month. It might be better to close out your position for real than synthetically.
 
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