Collars

[erol]

I was wondering if anyone uses these... and if so, is there a strategy where you can "roll the collar" so that you move "the legs" as the prices increase (without incurring substantial costs)?

Would this require an automated trading strategy?

I'm trying to find it online and I can only find basic strategies.

thanks in advance!

 

[spindr0]

Quote from erol:

I was wondering if anyone uses these... and if so, is there a strategy where you can "roll the collar" so that you move "the legs" as the prices increase (without incurring substantial costs)?

Would this require an automated trading strategy?

You might have to think this out a bit more. Assuming you're collaring with adjacent strikes, how do you get out of one strike range and into the next w/o going ITM (call) and having to pay dearly for the roll? And if you're not ITM, would you roll???

An automated trading strategy? Might one need a strategy first?

Tho I don't play there anymore, I liked overwrites for the collar concept. For ex, if you have 500 shares, sell 6 OTM calls to fund the buy of the 5 OTM puts. If nakedness freaks you, do a 5/5 and sell 1 bearish call spread above to generate add'l premium. Eg,

+5 50p
500 @ 52
-6 55c

and possibly
+1 60c

I assume you're dealing with an existing equity position. If not, bear in mind that a collar is simply a vertical spread.

 

[dagnyt]

Quote from erol:

I was wondering if anyone uses these... and if so, is there a strategy where you can "roll the collar" so that you move "the legs" as the prices increase (without incurring substantial costs)?

Would this require an automated trading strategy?

I'm trying to find it online and I can only find basic strategies.

thanks in advance!

May I respectfully suggest that you abandon the collar (a strategy that I believe is very effective for investors who don't understand options - but who want to insure the value of their portfolios) - and trade the much simpler, yet equivalent position of selling a put spread, or buying a call spread.

Two legs instead of three.

Fewer commissions to pay.

Much easier to roll.

To do this, buy the same put you have in the collar, and instead of buying stock and selling the call (covered call), simply sell the put (same strike and expiration as the call). Voila. A collar equivalent: the put spread.

If you don't like that, then buy the call spread that, along with the put spread, completes the box.

Mark

 

[spindr0]

Quote from dagnyt:

May I respectfully suggest that you abandon the collar (a strategy that I believe is very effective for investors who don't understand options - but who want to insure the value of their portfolios) - and trade the much simpler, yet equivalent position of selling a put spread, or buying a call spread. Two legs instead of three. Fewer commissions to pay. Much easier to roll.

Absolutely correct unless it's a pre-existing equity position that one wants to protect.

 

[erol]

thank you both again.

spin: yeah that's what I couldn't get my head around, if the call goes ITM, buying back and rolling would cost me.

I figured someone must have though of rolling...

I don't think I'm comfortable with one of the calls being naked, nor do I think any of my accounts will allow it.

Mark: thanks for the suggestion. I completely agree.

The reason I'm inquiring about collars is I do want to invest and am currently invested in equities for the long term. However I want to insure my position w/out paying for it. But I'm not a fan of limiting the gains (which is inconsistent with my long term strategy). So I wondered if I could roll the collar at certain times to allow for that growth in the underlying.

The only thing I can think of is, instead of using LEAPS, using 1-2 month calls/puts, so that each month I can adjust the price depending on where the underlying is. I just wondered if there was a better way.

 

[dagnyt]

Quote from erol:

However I want to insure my position w/out paying for it.


Ok. that's the collar.

But I'm not a fan of limiting the gains (which is inconsistent with my long term strategy).

When you sell calls, you limit gains.

That's the trade-off. You get the insurance for free (or cheap) and limit gains.

To constantly roll calls higher only works when the markets are surging.

Mark

 

[erol]

Yeah... I realize I can't get something for nothing...

My apologies for the bombardment of questions, but is this crazy?

I've been playing around with TOS paper money, and I'm thinking, use the credit from a bull put spread, to pay for an OTM put (so basically a put back spread, I think).

So instead of limiting returns, I've taken on additional risk.

using a short ATM put, and $5 OTM put, I have enough to buy 2 OTM puts, which (with the underlying) gives me what looks like a strangle.

My head is starting to hurt... I'll keep trying things out.

 

[spindr0]

Quote from erol:

The reason I'm inquiring about collars is I do want to invest and am currently invested in equities for the long term. However I want to insure my position w/out paying for it. But I'm not a fan of limiting the gains (which is inconsistent with my long term strategy). So I wondered if I could roll the collar at certain times to allow for that growth in the underlying.

The only thing I can think of is, instead of using LEAPS, using 1-2 month calls/puts, so that each month I can adjust the price depending on where the underlying is. I just wondered if there was a better way.

You can't have your collar and like it too. If you want the insurance component you have to limit the gains. If you don't want to limit the gains then just buy protective puts. The only way to give yourself more upside room is to use LEAPS where the embedded cost of carry makes the call premium higher, giving you more upside than downside distance to strike (assuming you're attempting to execute no cost collars).

Rolling? There's really no good way to achieve this. About the only scenario where it will work will be verrrry close to expiration with the underlying just under the call strike. And how often does that happen? Otherwise, you're either going to have to pay dearly to buy to close the current call or pay dearly to buy the next collar's put.

IMHO, the best thing to do in turbulent times like last fall is to get out of Dodge. If you can't do that and want to protect short term, add the collar. But I don't think that collaring individual positions as an everyday ongoing strategy is all that feasible. I think that you'd be better off using index protective puts or index OTM bearish credit spreads to globally hedge.

 

[spindr0]

Quote from erol:

I've been playing around with TOS paper money, and I'm thinking, use the credit from a bull put spread, to pay for an OTM put (so basically a put back spread, I think). So instead of limiting returns, I've taken on additional risk. Using a short ATM put, and $5 OTM put, I have enough to buy 2 OTM puts, which (with the underlying) gives me what looks like a strangle.

Yep, it looks like a strangle until you reach the strike with the lower number of options.

Assuming my take is correct that you are attempting to implement the above in order to hedge your long equity position then use your equivalents to turn the stock position into a backspread:

-1 20 put
+3 17.5 p

is the same as:

+100 stock @ 20
-1 20 call
+3 17.5 put

 

[erol]

yeah, i'm trying to figure out how I can insure without giving up my upside, or substantially giving up my upside.

i see that rolling collars would be costly, and thus not feasible.

i like the index protection... that makes sense. I guess I could use TOS and beta-weight my portfolio against an index to find what kind of protection i need?

In terms of what I was thinking, there is no short call:

-1 20 put
+3 17.5 p

is the same as:

+100 stock @ 20
-1 20 call
+3 17.5 put

so I'd have

+100 stock @ 20
-2 20 put \
-----------------> Sell vertical to pay for protection
+2 15 put/

+1 15 put -cover long stock
+1 15 put (if there's enough credit) to profit from downside

so I use a put-back spread to cover my long position

The only issue here is I have to maintain cash to cover the verticals (I think).