Spin and Walt,
Looks like a really good discussion shaping up!
A few more comments--
1) Don't write off the double broken butterfly. Just last month, I set up some that involved a potential reward roughly equivalent to the margin committed, but with a win rate exceeding 75% (of course, the win amount would be low much of the time). With adjustments available and careful management, I think that the win rate can actually reach close to 90% and the reward can also be increased. The market has been cooperating nicely so far. If things keep going well, I'll have to have you two up to Alberta for some of the best steak you'll find anywhere to help me celebrate! I don't think collars can give that kind of profitability unless very actively managed as described at the end of this post, frankly. Most of the time, the risk is very small, but the reward is modest at best, being limited by the written calls.
2) Just to be very specific and make sure we are all on the exact same page, I define a calendar collar as
a) buy 100 shares of stock (you could use margin, but this increases risk).
b) sell 1 call ATM or one strike above. This call is two or three months in duration.
c) buy 1 put ATM or one strike below expiring in the current month.
Walt is also proposing a variation that has a 3 month call and a 2 month put, which also qualifies, although less risky than the one we've been talking about.
Ideally, these positions are put on when a stock is right on a particular strike price which makes matters simpler.
You can skew things according to your own bias on the direction of the stock, but this can change the structure of returns quite a bit. Most people start out with no assumption of direction and then try to manage them for a profit. In that case, setting up on a strike avoids bias.
c) Now to the theta decay issue. There is no easy way to avoid decay. As you no doubt know, the rate of decay is fastest in the front month. In fact, in most real life situations, for a call or put that expires in two months, 60-75% of the decay will be in the last four weeks, and only 25-40% of the decay will happen in the first four weeks. If, for example, you move to the 2 vs. 3 month situation Walt mentions, your decay ratio (put decay versus call decay) is better, but you will still want some movement to help your position. Obviously, if the stock moves upward somewhat, the next puts will be cheaper. If the market moves downward, the position will need to be exited. The no movement situation is the most uncertain of the three.
d) Spin-- I believe that if the stock moves sharply downward (at least 15-20%) by the end of the first month, the value of the written call will decline pretty dramatically. It will have some theta decay, and the deltas also will help quite a bit, more than likely offsetting the vega issues. At the point of expiry, the put + the stock will be equal to the ATM strike meaning their total value is fixed in the event of a decline. So I contend that this is a way to modest profits if exited at the front month expiry. If the call declines enough so that it decreases more than the cost of the put, you will earn a little, perhaps 2-3%.
e) I have seen some Optionetics discussions about active management of these types of positions, rolling puts and calls to different strikes as conditions dictate, using some specific rules to help guide the decision making process. These might be helpful in many situations. Many of them operate in a similar manner to the adjustment I described in my first post, where a sharp rise resulted in rolling the puts up a couple of strikes, hoping to have a retreat soon after so that some noticeable profits could be made. A sudden drop could also be used in a similar way, rolling the calls to lower strikes and hoping for a rebound. A stock that behaved in a jagged pattern would be superb for this strategy. At first glance, this is the one way that I can see collars being used to generate profits that could exceed 10% in a month. Any other ideas??
