Costless Collar Question

V

vanzandt

Reading Marsman's TWTR posts he refers to this strategy.

In the example given in this link: http://www.theoptionsguide.com/costless-collar.aspx

....they sell a $60 call for $5 and buy a $50 put for $5 .... for the same month one year out.

This can never happen right? The puts and calls are mostly balanced from what I've seen. Unless its an etf like VXX I guess.

For example, today C is trading right at $50(+/-). The $50 puts for June 2017 are $4.13 --- The $60 calls are selling for .56

What am I missing here?
 
vanzandt said:
Reading Marsman's TWTR posts he refers to this strategy.

In the example given in this link: http://www.theoptionsguide.com/costless-collar.aspx

....they sell a $60 call for $5 and buy a $50 put for $5 .... for the same month one year out.

This can never happen right? The puts and calls are mostly balanced from what I've seen. Unless its an etf like VXX I guess.

For example, today C is trading right at $50(+/-). The $50 puts for June 2017 are $4.13 --- The $60 calls are selling for .56

What am I missing here?
More...

You're not missing anything based on their example. They made up some numbers just to get the idea across.

More realistically, costless collars are very limiting strategies meant to preserve against catastrophic failure but at the expense of any growth. The realistic values make it an unsatisfying strategy if you want to grow.
 
vanzandt said:
Reading Marsman's TWTR posts he refers to this strategy.

In the example given in this link: http://www.theoptionsguide.com/costless-collar.aspx

....they sell a $60 call for $5 and buy a $50 put for $5 .... for the same month one year out.

This can never happen right? The puts and calls are mostly balanced from what I've seen. Unless its an etf like VXX I guess.

For example, today C is trading right at $50(+/-). The $50 puts for June 2017 are $4.13 --- The $60 calls are selling for .56

What am I missing here?
More...


You aren't missing something. Skew causes the puts to be more expensive than the calls.

So in your C example:
stock=50
jun 45 put is 2.16
jun 55 call is 1.6

you can make up to $5 to lose upto $5 and you pay 66 cents (or over 1percent).

To make it costless you would have to sell a lower strike call making your upside downside like $4 to -$5.

As an aside, don't use marsman as a source of options education.
 
Here's a live example:

JNJ is selling at 113.64. The Jan 115 call is selling for 2.09 and the Jan 110 put costs 2.00.

I could buy JNJ, sell the call and buy the put. My max down is 3.64 my max up is 1.36. IF JNJ ends jan expiration at 115 or above I will make 1.36. If it ends at 110 or below I will lose 3.64.

Max yield = 136/11364 = 1.2% in 3 months or 4.8% annualized. I need the up probability to be 2.7 times the down probability in order to have a positive expectation. Sometimes you can get a dividend to make the deal a little better but usually the dividend is built into the option prices...plus transaction costs.

Won't make you rich.

Hey...I just looked and JNJ will pay an 80 cent dividend in December. Makes it a little better bet...but not much.
 
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CyJackX said:
You're not missing anything based on their example. They made up some numbers just to get the idea across.

More realistically, costless collars are very limiting strategies meant to preserve against catastrophic failure but at the expense of any growth. The realistic values make it an unsatisfying strategy if you want to grow.
More...
Yeah thats what I figured.

Mars must be scanning 100's of stocks to find the ones that fit. Biotech is probably the fertile hunting grounds I would imagine.

And Deut..... just trying to learn here and broaden my horizons. Nothing wrong with that right? 25%/week claims, even if he's off by 90%.... merits further investigation imo. Like I said,.... I'm always open to learning.
 
CyJackX said:
You're not missing anything based on their example. They made up some numbers just to get the idea across.

More realistically, costless collars are very limiting strategies meant to preserve against catastrophic failure but at the expense of any growth. The realistic values make it an unsatisfying strategy if you want to grow.
More...
It is a good way to preserve the value of un-exercise company stock options when you already have lots of upsides.
 
It doesn't matter.. you can always find a costless one... just not with an ATM put and OTM call...
Because... if the ATM put is X... than the ATM call is also X... and the OTM call is less than X...

Otherwise put call parity doesn't hold... and no matter how hard Mutlu screams and shouts... it... is... not... going... to... happen...

So, a costless collar with OTM put and OTM call always has a risk... it might be costless, but not riskless.

EDIT: okay, OTM call can be the same price (or higher) as the ATM put, but only when interest is high enough, or the expiry date is further out. And in that case, you're paying interest to setup that strategy and that will mean no gain... THERE IS SIMPLY NO FREE F^&$'N LUNCH!!!!! :banghead::banghead::banghead:
 
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