Equity collar plus short put using LEAPS?

A

alopecoid

Does this strategy have any merit and/or a name?

All options are 2021/01/15 dated for the same stock:
  • Buy 100 shares @ ~$237 per share.
  • Sell one $320 call @ ~$42.
  • Buy one $220 put @ ~$51.
  • Sell one $110 put @ ~$9.
Total cost remains @ ~$237 per share.

Possible outcomes?
  • Called away @ $320 per share for a minimum (at expiration) return of ~35%, or ~22% annualized.
  • Stock remains between $220 and $320 at expiration and all options expire. I still own 100 shares.
  • Stock falls between $110 and $220 near expiration. Short legs can be bought back to close for cheap leaving only the intrinsic value of the long protective put.
  • Assigned if stock falls below $110. The 100 shares of equity in conjunction with the protective put ensures minimal loss and should cover the cost to buy-to-close the short call on the cheap in addition to the obligation to purchase 100 shares at $110, a ~54% discount on today's price.
  • Stock approaches the short call price and there is the opportunity to roll the collar up-and-out, probably with enough credit to cover the cost to buy-to-close the short put on the cheap, leaving only a standard equity collar going forward.
Did I miss something? I'm sure that I did. I know that this isn't particularly capital efficient, but seems like a very good risk/reward profile unless the stock tanks significantly more than ~54% (but I am generally bullish on the stock in question and would probably buy at that price point anyway). Is it that this trade would never get filled at these prices? If it could get filled, would a broker allow the 100 shares of equity in conjunction with the protective put to cover the short put (without any additional cash collateral or margin)?

Thanks!

P.S. I'm sure it's tempting, but please refrain from the requisite "directional boobage" joke here... :)
 
Last edited:
Thoughts? Do the synthetic instead of the stock and the put. Buy a $220 call - it juices your return. Your premiums look rich, but without knowing more. Based on a guess of parity the $220 call should be about $70 - makes the $320 call look really rich.
 
alopecoid said:
Does this strategy have any merit and/or a name?

All options are 2021/01/15 dated for the same stock:
  • Buy 100 shares @ ~$237 per share.
  • Sell one $320 call @ ~$42.
  • Buy one $220 put @ ~$51.
  • Sell one $110 put @ ~$9.
Total cost remains @ ~$237 per share.

Possible outcomes?
  • Called away @ $320 per share for a minimum (at expiration) return of ~35%, or ~22% annualized.
  • Stock remains between $220 and $320 at expiration and all options expire. I still own 100 shares.
  • Stock falls between $110 and $220 near expiration. Short legs can be bought back to close for cheap leaving only the intrinsic value of the long protective put.
  • Assigned if stock falls below $110. The 100 shares of equity in conjunction with the protective put ensures minimal loss and should cover the cost to buy-to-close the short call on the cheap in addition to the obligation to purchase 100 shares at $110, a ~54% discount on today's price.
  • Stock approaches the short call price and there is the opportunity to roll the collar up-and-out, probably with enough credit to cover the cost to buy-to-close the short put on the cheap, leaving only a standard equity collar going forward.
Did I miss something? I'm sure that I did. I know that this isn't particularly capital efficient, but seems like a very good risk/reward profile unless the stock tanks significantly more than ~54% (but I am generally bullish on the stock in question and would probably buy at that price point anyway). Is it that this trade would never get filled at these prices? If it could get filled, would a broker allow the 100 shares of equity in conjunction with the protective put to cover the short put (without any additional cash collateral or margin)?

Thanks!

P.S. I'm sure it's tempting, but please refrain from the requisite "directional boobage" joke here... :)
More...

You're long the 220C/320C vert from 26. Short the 110P from 9. Or you can look at it as short the 220/320P spread from 74 and short the 110P from 9. The difference between the former and the latter is the box. They're equivalent. Why be long the vertical and short the 110P?
 
Last edited:
Your risk is $2,600 <$220 excluding the risk on the $110P. You're out $1,700 between $110 and $220 with the 110P.

Puts are calls, and calls are puts, the only difference is shares. Learn synthetics as your stress is all wrong.
 
Ah, yes. Essentially, "[...] the collar is synthetically equivalent to a long call vertical spread. In other words, the long put plus long stock has the same risk profile as a long call with the same strike as the long put." [source]

In this case, the $220 call is ~$76. Since the vertical spread is much less capital intensive, we have to also offset its risk with current Fed rates on the saved capital. All said, both strategies have the same ~$1700 risk (ignoring the risk of the short put in both cases). The max gain is slightly higher with the collar approach, but that's assuming fills at these quotes.

Thanks for the feedback!
 
You must log in or register to reply here.
Back
Top