costless collars

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Ozzy_34

Hi,
I was hoping someone can help me on this... I always read about costless collars or near costless collars. This is where you own 100 shares of the underlying, purchase an ATM put for downside protection, and then sell an OTM call and use the that collected premium to help purchase the put. So, theoretically, the ATM put prevents you from losing (since you resell at the put strike price), and the OTM call limits your profit to the strike price of the call.

However.... every time i look at the options chains... i never ever find anything where the premium collected by selling the call can pay for the entire put, or even close to it. You'll be lucky if the call can cover anywhere near 50% of the put premium! and this is true on any stock / index you look around in. Yet there's examples everywhere in books and articles how the selling of the call can cover up to 80%, 90%, or even 100% and over of that put premium. How and where does one find these trades? I can never find them. Please help.
 
Ozzy_34 said:
Hi,
I was hoping someone can help me on this... I always read about costless collars or near costless collars. This is where you own 100 shares of the underlying, purchase an ATM put for downside protection, and then sell an OTM call and use the that collected premium to help purchase the put. So, theoretically, the ATM put prevents you from losing (since you resell at the put strike price), and the OTM call limits your profit to the strike price of the call.

However.... every time i look at the options chains... i never ever find anything where the premium collected by selling the call can pay for the entire put, or even close to it. You'll be lucky if the call can cover anywhere near 50% of the put premium! and this is true on any stock / index you look around in. Yet there's examples everywhere in books and articles how the selling of the call can cover up to 80%, 90%, or even 100% and over of that put premium. How and where does one find these trades? I can never find them. Please help.
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Books are probably old and written before massive QE which is going on right now everywhere... so this long bias of stocks is incorporated in option prices, this is why ATM calls are so cheap compared to ATM puts...
 
very interesting! i didn't think QE had this much effect on options prices. it does make sense though. I guess we have to wait a while for options prices to re-adjust to their normal levels then. Thanks.
 
Huh? How does the long bias translate into cheapness of calls?

What books specifically mention these types of costless collars? I have a hard time imagining a +ATM put/-OTM call combination being costless or even nearly so...
 
Martinghoul said:
Huh? How does the long bias translate into cheapness of calls?

What books specifically mention these types of costless collars? I have a hard time imagining a +ATM put/-OTM call combination being costless or even nearly so...
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I can -in case of real random walk... but there isn't such thing is markets.
 
Ozzy_34 said:
very interesting! i didn't think QE had this much effect on options prices. it does make sense though. I guess we have to wait a while for options prices to re-adjust to their normal levels then. Thanks.
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Maybe it will be better to adapt yourself, than wait :D This situation can last for tens of years...
 
Hi Martinghoul,

I think what Tom_czr is implying is that QE is affecting interest rates which in turn is keeping the call option premiums low (correct me if i'm wrong Tom). This is why you can't collect a high enough premium to pay for the put insurance.

There's actually a lot of articles on the internet that i run across that cover collars / near costless collars. I can't think of the trading books right now, but they do mention them as well.

From my experience though, every time i run across ANY type of options strategy, the prices you find on the options chain almost never give you anything near the examples given to you, whether in articles or in books. I imagine this has to do with the QE that Tom mentioned above, affecting options prices everywhere.
 
Ozzy_34 said:
Hi Martinghoul,

I think what Tom_czr is implying is that QE is affecting interest rates which in turn is keeping the call option premiums low (correct me if i'm wrong Tom). This is why you can't collect a high enough premium to pay for the put insurance.

There's actually a lot of articles on the internet that i run across that cover collars / near costless collars. I can't think of the trading books right now, but they do mention them as well.

From my experience though, every time i run across ANY type of options strategy, the prices you find on the options chain almost never give you anything near the examples given to you, whether in articles or in books. I imagine this has to do with the QE that Tom mentioned above, affecting options prices everywhere.
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How do interest rates (affected by QE) keep call (and not put) option premia low? This doesn't make a lot of sense, sorry...

As to the articles, yeah, I can imagine that a lot of people look at costless options structures of this sort, such as collars, seagulls, etc... Depending on skew, you can probably find interesting possibilities there, but I really have a hard time imagining that you could find smth as compelling as what you have described.
 
Martinghoul said:
How do interest rates (affected by QE) keep call (and not put) option premia low? This doesn't make a lot of sense, sorry...

As to the articles, yeah, I can imagine that a lot of people look at costless options structures of this sort, such as collars, seagulls, etc... Depending on skew, you can probably find interesting possibilities there, but I really have a hard time imagining that you could find smth as compelling as what you have described.
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Marty, let me intervene. I think what they are referring to is a long term split strike collar, not the same strike. This actually could be done 6 or 7 years ago. Higher interest rates raise call prices and lower put prices via the synthetic counterpart. So for example, 6 or 7 years ago, you could find a $150 stock lets say, go out 2 years and sell the 175 call for say 15 and buy the downside 125 put for 15. There is very little put skew in long dated options and assuming there are no dividends in the stock, provided rates are high enough, the interest cost is embedded in the call option and depressed in the put option.

Now I've never EVER heard of being able to buy an ATM put and sell an OTM call under any circumstances for even. That's just silly. The OP will basically have to take a stock position, convert it synthetically into a vertical call spread that he will have to hold for years and lose what he could have earned in interest.

To the OP, there is nothing secret or unique to this trade. It locks you in for a very long time and there really is nothing to gain from it although the usual hucksters put this out there for newbies to get excited and fork over 3k for their course or seminar. Nothing new here.
 
Correct... the trades i am looking at are not the same strike. the put would be ATM or close to it, and the call would be OTM. but the prices are all horrific. The calls can only cover a small percentage of your put. I guess this goes back to QE affecting interest rates?
 
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