Buying/Selling Options

However, it seems that all these adjustments can be replicated with the equivalent options spread anyway, so why the collar should be superior didn't make sense to me. However, when ex marketmakers (3 different ones) espouse the virtues of collars/married puts over the equivalent option spreads, I find it difficult to argue (I'm only a retail trader with limited experience).
Thanks all for your replies.
Cheers
daddy's boy [/B]
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This is something I've had heated discussions about as well. I'm in agreeance with the comments re synthetics from Mav, MTE et al.

So why are these MM dudes giving the nod to the collar over the vertical.

It doesn't make sense to me
 
Quote from RichardRimes:

not all MM's do....not all MM's made money either
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But... but... but... at least one of these guys claims to have turned about $3.57 in loose change into an amount equal to the GDP of Estonia within a year and a bit. (pardon my embellishment)

Nobody has been able to mathematically prove it yet though.

Here is what was posted on another forum. (from one of the MMs in question)

The risk graph of a collar and bull call spread are the same, but that is where the similarities end.
You have a much better chance of making money over the long run with collars than bull call spreads because you are always in the position and the stock acts as a flotation device by which you remain at equilibrium.

The problem with a call spread (which is not like the collar) is that if you purchase an OTM call spread the stock can go up and you still lose money if the stock does not appreciate beyond the b/e point. Then when the options expire, you have to put on a new vertical call spread. Because of the run up in the stock which you may not have capitalized on, you will likely have to pay much more for the same vertical spread out the next month or move up a strike. If this keeps happening on a slowly drifting higher stock you could be chasing profits all the time without actualizing any. It is a non-fluid trade because of the starting and stopping effect of moving options around every month.

COLLAR FIXES THIS:
The collar is superior to the vertical because you will be in the stock at all times and do not run into the static fluctuations inherent in an option only strategy. Yes, you have options in the form of a short call and long put, but that is what you want with regard to the horizontal lines of the PNL or Risk Graph of this trade. It is the horizontal line of the stock with the collar that flows while the horizontal line on a vertical has to be moved every month which can disrupt profitability.

Conclusion:
Though the profit and loss graphs of a vertical spread look the same in any given month, they are drastically different when you compare spreads v. collars over several months (or longer). It is for this reason that I think the collar is a greatly superior trade than a vertical. It is why guys who are poor at picking market direction (I am not stating Peter Achs here) can make a fortune trading collars but have a more hit-or-miss track record with verticals. This is an important distinction!
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The only difference I can see is purely psychological.
 
Even as a complete novice (still:p) I can see where he leaves out volatility when he states the problems with the OTM debit call spread. Because vols usually go down when stock goes up...the new month calls will NOT necessarily be more "expensive" to buy. Also why are you doing OTM call spread anyway? How far OTM? Does he spend ANY time discussing how volatility affects options (in the book)? I also don't know how he can say options are "static" or non fluid trade.. volatility and the greeks create an incredibly fluid instrument.

It is a personal preference as you suggest depending on the bias you bring to the table.

edit. I also DO NOT believe anyone can consistently make a FORTUNE doing CC's and collars. Realistically given decent market conditions (nicely trending upside) you can make %15 a year on CC's..less if you have to buy put protection. Unfortunately the market is just not that accomodation. :(
 
Quote from wayneL:

But... but... but... at least one of these guys claims to have turned about $3.57 in loose change into an amount equal to the GDP of Estonia within a year and a bit. (pardon my embellishment)

Nobody has been able to mathematically prove it yet though.

Here is what was posted on another forum. (from one of the MMs in question)



The only difference I can see is purely psychological.
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This guy is on crack. He is 100% wrong and I can prove it mathematically. Bring that guy over here so I can go one on one with him in the octagon. I will rip that guy to shreds. Seriously man, where is the SEC on this shit? Hopefully by now, all you ET'ers realize that a synthetic is EXACTLY the same position as it's actual. It does not matter what the stock does or how much you have to roll the position, it is 100% the same. There is NO difference. Please, someone invite that kind gentleman over here and post a link to where he is and I will pay him a kind visit. :)
 
Quote from Maverick74:

This guy is on crack. :)
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LOL

That is EXACTLY what I said.

The bloke that wrote that is Scott Kramer on the on his optionetics board. Also saw something similar he wrote on Yahoo in the last couple of days... can't remember where.

I will try to find the URL where he said that and PM it to you. (if I can find it, we were discussing it on another forum)

Cheers
 
wayne and mav are right. if there is ever a difference between the synthetic and conventional position there is a free arb opportunity.
 
Prevail

wayne and mav are right. if there is ever a difference between the synthetic and conventional position there is a free arb opportunity.
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Pretty much true, but there can be a difference due to dividends, buyouts, tender offers and things of that nature. Which would make the possible arb unprofitable.
 
Quote from Maverick74:

This guy is on crack. He is 100% wrong and I can prove it mathematically. Bring that guy over here so I can go one on one with him in the octagon. I will rip that guy to shreds. Seriously man, where is the SEC on this shit? Hopefully by now, all you ET'ers realize that a synthetic is EXACTLY the same position as it's actual. It does not matter what the stock does or how much you have to roll the position, it is 100% the same. There is NO difference. Please, someone invite that kind gentleman over here and post a link to where he is and I will pay him a kind visit. :)
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You can now see the source of my confusion Mav.
The link below should take you to the discussion board, but be warned, you'll encounter heavy resistance :):
http://www.optionetics.com/forums/topic.asp?fid=191&id=42699
and also
http://optionetics.com/market/articles/article.asp?id=15510
Best
daddy's boy
 
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