collars

[asdfghj7]

Would someone please advise me to the software or website that tracks the very best collar trades for stocks.


Price of XYZ 100
Example A
Long 100 shares at 100
Long Dec 100 put for 4
Short Dec 105 call for 3

Example B
Long 100 shares at 100
Long Dec 100 put for 8
Short Dec 105 call for 5

I don't know what the fancy name is when the market is most favorable for a collar trade. Obviously everyone wants to be able to have a riskfree postion right from the start or at least the trade most in our favor from the get go. Above is the same trade with different premiums. I'm looking for something to scan for Example A type trades. I can get Example B figures in the majority of stocks out there. Examples of collar trades are in every book including a picture of the actual risk-free trade computer screen on their computuer. What are these authors using to find higher probabilty collar trades vs just getting in any old position that would be defined a collar.

 

[MTE]

A collar is never a risk-free position unless you leg into it! And if you think of a collar as a synthetic long call vertical spread (aka bull call spread) then you can easily see why it is so.

The only reason it may look like a risk-free position on some graph is because the cost of carry on the long stock is not accounted for.

 

[spindr0]

As mentioned by MTE, collars are not risk free unless legged into. In your example A, the risk is $100 plus the carry cost. $300 plus the carry cost for Example B.

A long collar is equivalent to a bullish spread. Bullish spreads are directional trades. They will gain if the underlying rises. They will lose if it drops. Therefore, your "higher probability trades" will be those where the underlying is in an up trend rather than where the option portion costs a little bit more or a little bit less.

 

[dagnyt]

Quote from asdfghj7:

Would someone please advise me to the software or website that tracks the very best collar trades for stocks.

Hi,

We've been back and forth many times now - on various issues - and I'm disappointed that you believe that

a) There is a 'very best' collar trade

b) You are willing to pay someone to provide such information.

The 'best' collar trade for you is a collar on a stock you WANT TO OWN. You will have a limited upside profit potential and a limited loss potential. In other words, as mentioned, it's EXACTLY THE SAME as buying a bullish call spread, or selling a bearish put spread. But the collar involves more transactions and commissions.

There are no magic bullets and nothing that's 100% protected against loss.

Mark
http://blog.mdwoptions.com/options_for_rookies/

 

[rickf]

IMHO one of the best use of collars are to protect stock positions you own, either to lock in a profit or protect your initial investment.

I've used this over the past year when I know upside is limited, downside is likely, but the company's dividend was safe. A collar allowed me to collect the dividend w/o risking my initial investment, just that I gave up significant upside gains on the underlying.

 

[gkishot]

Quote from rickf:

IMHO one of the best use of collars are to protect stock positions you own, either to lock in a profit or protect your initial investment.

I've used this over the past year when I know upside is limited, downside is likely, but the company's dividend was safe. A collar allowed me to collect the dividend w/o risking my initial investment, just that I gave up significant upside gains on the underlying.

I believe that dividends are priced in in the cost of carry so whatever you collect in dividends you loose in the cost of carry. Please someone correct me if I am wrong.

 

[rickf]

Quote from gkishot:

I believe that dividends are priced in in the cost of carry so whatever you collect in dividends you loose in the carry cost. Please someone correct me if I am wrong.

I think you're right -- but the catch is to try and ensure you still can come out either ahead or close to zero-cost through looking at the various strikss and timeframes going out a few months or more.

 

[gkishot]

Quote from rickf:

I think you're right -- but the catch is to try and ensure you still can come out either ahead or close to zero-cost through looking at the various strikss and timeframes going out a few months or more.

Don't you agree that even if you are successful in doing that the profit margins are so negligible that you might be better off by keeping your money in CDs?

 

[dmo]

Quote from gkishot:

I believe that dividends are priced in in the cost of carry so whatever you collect in dividends you loose in the cost of carry. Please someone correct me if I am wrong.

Right. Cost of carry is interest rate minus dividends.

 

[rickf]

Looking over the last year, I am happy that I collared some of my positions.

IE -

XYZ at 80
Sell the 90 call, buy the 70 put for maybe a .50 debit.

XYZ goes to 70. Keep the call premium and collect 2 rounds of increasing dividends over a 6 month period. Was cheap insurance on my underlying position and my principal investment was protected even if a small sliver of the dividends was needed to cover the initial debit on the collar. The collar expired, I rolled it down, and will do it all over again.

In this market, I will quote (I think) Will Rogers - I am more concerned with the return OF my money than the return ON my money. In that case, collar was fine.