Collars

[spindr0]

Let's ignore the discussion of whether adding a backspread is good protection and just focus on the equivalence. Do you realize that a covered call is the same as a naked put?

Ignoring dividends and carry cost:

+ stock - call = - put

For ease of discussion, consider one August backspread. You want to add one -Aug20p/+Aug 15 put spread and take the credit and buy say 2 more Aug 15 puts. Instead of doing that, sell one Aug 20 call against your stock and use the call premium to buy the Aug 15 puts.

If the call premium pays for 3 puts, you end up with:

+100 XYZ
- 1 Aug 20 call
+3 Aug 15 put

So instead of adding a backspread to your long stock and doubling your downside riisk (tripling it in your original suggestion), just convert the stock into one backspread. The above would be the same position as:

- 1 Aug 20 put
+3 Aug 15 put

Clear as mud?

 

[erol]

understood!

except now I've got a bearish bias when i do believe my stocks will rise, except I want to protect against the things I have no control over.

But this synthetic put back spread is great "when" there's another crash... and if I can set this up in time (given I own the underlying).

But yeah, i was trying to do a call back spread with the underlying, it doesn't work w/out incurring costs.

I think the way to go is to do short term collars and adjust them every 1-3 months.

this was a great mental exercise for me! thanks again both of you for the input/advice.