Calendar Collars

[spindr0]

Quote from jones247:


I'd like to bounce the following adjustment to the calendar collar off you. Instead of buying a front month put (30 days from expiration) and selling a 60 day call, I would move all transactions an additional 30 days out. In other words, buy a 60 day put and sell a 90 day call. The plan would be to make the adjustment (i.e. roll) or close-out the collar within 30 days after establishing the position. The theta impact is most aggressive in the last 30 days. Therefore, I would aim to never have a long position with less than 30 days to expiration.

If I needed to make an adjustment/roll, I believe that I could close-out the call & put after 30 days, then open a new 60 day long put and a new 90 day long call.

I think that you'll find that doing a 2:3 instead of a 1:2 buy/write (months out) won't make much of a difference if there's a large down move but when you compare the higher decay rate of the 1 month put versus the somewhat lower delta of the 3 month call (compared to the 2 month call in the other position) you'll find that with the 2:3 you give up some of the upside and in return you'll have not quite as bad a result if the UL goes nowhere. It's pick your poison price

EDIT: That reads really poorly (g). The 1:2 does worse if the UL goes nowhere but does much better to the upside. That's your tradeoff.

 

[spindr0]

Quote from jones247:

Thanks for your feedback; however, I believe that a short strangle with long ratio wings or a backspread has a better risk:reward and win rate than the DBWB... but that's another thread...

I won't argue the point because the risk graphs are very different.

Ignoring the complications of IV change, an iron condor or ratioed IC (more insurance on the wings), aka an RIC, is going to make more b/t the strikes than a DBWB. So yes, a better risk/reward. But a move toward the wings takes you into negative territory first followed by a recovery or even a profit if there's a really big move.

What intrigues me about the DBWB (or even a plain, balanced double butterfly) is that a move to the wings takes you into positive territory first before heading south so in the absence of a monstrous gap, you have the chance to profit first.

 

[spindr0]

Quote from JohnGreen:

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.

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.

I think that if it's a one month put buy and a two month call write, it won't make much of a difference what the initial IV is (within reason) or what the stock price is (near put strike, in the middle or near the call strike). Yes, the stock price will skew where the maximum loss is, etc. but AFAIK, it's going to be a loss to the downside, regardless.


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%.

Just more of the above... If set up when the stock is at the lower strike, the initial premium and subsequent decay rate on a 2 month next stike up call isn't going to be enough to offset the loss of the entire put premium at near term expiry if the UL drops. If set up when the stock is above the lower strike, say midway, the higher call premium received and lower put premium paid along with the aforementoned decay rate/total loss will not be enough to offset the total loss of the put premium plus the loss on the stock down to the put strike. If you have an example with realistic premiums, please post it.

 

[jones247]

There's an Optonetics article on "The lazy Stock Collar" where AAPL experienced a 13% decline in a 5 month period (from $70.29/sh to $60.72/sh); however, the trader was able to yield an increase of 4%. That's an annualized return of 10%.

This was a standard collar, not a calendar collar. The objective was to enter a new collar position at the expiration of the existing collar position. The author mentioned that it's called the "lazy" collar because he's only trading once a month at or near expiration. He mentioned that he "left so much money on the table that any professional trader would be embarrassed to claim that he did the trade as described. Many multiples of what was made could have been actualized had it been done correctly." In other words, it seems that he could have made about 20% annualized if he was more aggressive instead of being "lazy".

An interesting aspect of this strategy is the fact that the author rarely tried to roll his positions. Instead the loss in stock value was offset with an increase in the short call & long put. The money gained from the options that often expired worthless was used to increase the size of the stock positions. I suppose that a good "rule of thumb" is to roll the collar only under the following two conditions: (1) the max profit is reached & (2) the cost of rolling to the next month is less than the current month max profit . Otherwise, it may be best to realize the profit and start over. In other words, since a collar is equivalent to a bull call spread, if it's at max profit, then close-out and start over; otherwise, let options expire at max loss and use the gains from the option positions to buy additional shares of stock, then set up a new collar position.

 

[jones247]

Btw... a 10% or 20% annualized return on capital is typically better than the s&p; however, the return can grow exponentially beyond 10% or 20% with futures and commodities. This is what makes this strategy so fasinating to me...

 

[JohnGreen]

Walt, in a good month, a broken or double broken butterfly managed nicely in a cooperative market ( and I realize that won't happen all that often, but it probably will happen at least once per year) will yield that percentage (10%+) or much more in a month, as well as generating profits (1-3%) in most of the other months. There will be only modest losses possibly once or twice a year.

Spin's point of how the risk graph is oriented is very, very important.
Ratioed wings must go through the loss zone before the profit zone. BWB's go through the profit zone first. This means you can take a decent profit way more often. You can also use various spreads to separate the profit zone from the loss zone and capture even more of the potential profits if you're careful.

Time decay also works for you with BWB's, but not with the ratioed wings. In other words, if the market stalls in its advance or decline, it won't hurt you. You will still capture the time decay related to the written options. Since BWB's are usually set for a credit, the net time decay helps out even if the market does nothing.

Spin, I'll have to play with a real life example to see if you are correct about the drop not being profitable for the calendar collar. I agree that with modest drops (less than 10%), you will lose with calendar collars, although the loss will be modest. Buying the second month put for a noticeably higher price than the first time around simply guarantees the certainty of a final loss because your outlay for the puts will be greater than the cash obtained for the sold call.

If the market moves up 10%, you should do well with the calendar collar because you can buy the second put much more cheaply than the first leading to a net credit for the options and a guaranteed final value. However, it is doubtful whether you would make more than 3-5% in two months unless you play for various swings.

 

[spindr0]

Quote from JohnGreen:

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.

As I mentioned previously, I've been looking for a high probability/modest gain strategy that could be a place for lower risk money (my day trading is the higher risk component). I've been paper trading IC's with extra insurance legs but they're just not what I'm looking for. I've realized that it's going to be something out of the box and double butterflies might be a possibility. Can you outline some general criteria for candidates for them? Or better yet, a couple of symbols that could be candidates for them? I'm confident that I can handle the management and adjustments as positions unfold. I'm just not sure what I'm looking for/at yet.


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!

Have you ever heard of Omaha Steaks? By mail?
(wink)


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??

Rolling puts up will lock in the stock gains of a collar. I don't see how one could viably roll a put up several strikes unless the initial call was several strikes OTM. Otherwise, you'd have to contend with a short call several strikes ITM.

A drop will not be profitable unless one is adding extra legs of put protection. As a general rule, you can't adjust your way out of a losing position unless you start overwriting above and the UL cooperates or get a sizeable rebound at some point.

Yes, a stock that behaved in a jagged pattern would be superb for this strategy (see GOLD which zig zags a bit). For the daring, one could reverse from a bullish collar to a bearish vertical (with leftover puts) by taking the gain on the appreciated stock and buying a call (same month higher strike or next month same/higher strike). I've done this with CC's. If right, gains both ways. If wrong, new position loses profits, maybe a small net loss if ridden too far up.

 

[spindr0]

Quote from jones247:

There's an Optonetics article on "The lazy Stock Collar" where AAPL experienced a 13% decline in a 5 month period (from $70.29/sh to $60.72/sh); however, the trader was able to yield an increase of 4%. That's an annualized return of 10%...

An interesting aspect of this strategy is the fact that the author rarely tried to roll his positions. Instead the loss in stock value was offset with an increase in the short call & long put.

I must be missing something. The gain from capturing the put premium plus the gain on the put won't offset all of the stock loss. It's a slow losing battle as the UL declines.

A collar is equivalent to a vertical so I wonder how one could do up to 5 consecutive monthly bullish verticals, have the underlying decline almost $10 and make money... unless one is reinvesting the put and call gains, increasing the size of the stock position and getting a good close on the last month's collar (near the upper strike).

Rolling isn't problematic unless the underlying has risen significantly above the call strike. Although the ideal collar is one placed near the lower strike that finishes at the upper strike, anything initiated b/t the strikes won't be significantly worse. So even if the UL is 1-2 pts ITM, the process can continue.

 

[jones247]

One of the challenges I have with the Double Broken Wing Butterfly is the fact that the break-even range is a fraction of the break-even range of a short strangle with ratio backspread wings FOTM. With a short strangle, the likelihood of a profit is better because it can handle a wider range of whipsaw than a DBWB. Another major issue with DBWB is the fact that it requires 6 legs. My broker, IB, does not allow for 6 legs simultaneously. Therefore, I would need to do the call legs, then the put legs, or visa versa. Nonetheless, I concur that the DBWB strategy is is a viable one with positive expectancy, especially when the market is range bound.

The more I think about it, the more I'm inclined to simply enter into a vertical spread, which is the synthetic equivalent of a collar. Many believe that a credit spread is better than a debit spread because there may not be a need to close-out a winning position, just let it expire. Nonetheless, the put/call parity shows that is really a matter of personal preference.

To keep things simple, bull put spreads at support and bear call spreads at resistance, with the willingness to roll up to three consecutive periods may be the best bet overall for trading collar equivalents... K.I.S.S.

Walt

 

[spindr0]

Quote from jones247:

One of the challenges I have with the Double Broken Wing Butterfly is the fact that the break-even range is a fraction of the break-even range of a short strangle with ratio backspread wings FOTM.

Well, yes and no. I'd say that if you use the same short strikes, the magnitude of the potential profit is far higher for your ratioed short strangle. But since your focus is more on a larger profit within that range and mine is on a smaller profit over a larger range, we're looking for different critters.

The problem I'm having is finding them where they can be put on for a credit w/o having the farthest OTM protective wings being out of sight. If I could find some with a modest credit, I'd put on slightly ratioed doubles all day long, even if it meant a net zero credit (say a +6/-10/+5 put and +f/-10/+6 call) so that a rare rrrealyy big move goes profitable. OK, I'm fantasizing.


With a short strangle, the likelihood of a profit is better because it can handle a wider range of whipsaw than a DBWB.

This one we disagree on. As John and I have mentioned, the DBWB goes profitable before it goes negative. The move toward short strike is good for it.


Another major issue with DBWB is the fact that it requires 6 legs. My broker, IB, does not allow for 6 legs simultaneously. Therefore, I would need to do the call legs, then the put legs, or visa versa.

Not as big a deal as you think. Set up a combo order for both butterflies as well as the orders with the prices that you want. Set alerts on both combos for 1/2 to 3/4 the amount more that you want and if one triggers, check the net. If short of it, reset the alert. If the total equals your net objective, adjust the price and with two clicks and you're filled.

The more I think about it, the more I'm inclined to simply enter into a vertical spread, which is the synthetic equivalent of a collar.

As I mentioned the last time you started a chain on calendar collars, unless one already owns the stock or intends to trade the individual components intraday, use the synthetic equivalent. As you said, KISS.