Isn't a collar just a glorified put credit spread?
- Thread starter kfir
- Start date
Yes. A collar is a long OTM put financed by a sale of an OTM call coupled with long ticker. As an example , Long QQQ at $130, with a long 125put and a short 135call is the "collar". Synthetically, the long ticker/long put is a long call on the 125 line , combined with the short 135 call makes it a long 125-135 call spread which synthetically is expressed as a short 125/135 put spread. Why would one prefer over the other? Possibly reasons are spreads of the legs, liquidity,margin.
If you are trading in a retirement account, you may not be allowed to trade spreads on American-style options. Often, the only short options allowed in such accounts (on stocks) are covered calls. Of course, you do not get leverage with a covered call like you do with a spread, and the collar is therefore much more capital-intensive than the spread.
Spreads should be done with a small portion of the account.
Spreads should be done with a small portion of the account.
I am not sure if collars are a good way to trade for profits? Maybe someone can help me understand?
Collar, especially no cost collars are popular with company employees that were awarded lots of stock options that are now ITM but still have time before vested or exercised. Often those are high tech volatile stocks. Brokerages often work with them to execute a no cost collars to lock in the profits. I sometimes used them to lock in profits but for tax plaining wanted to push the stock sale into the following year.
Collar, especially no cost collars are popular with company employees that were awarded lots of stock options that are now ITM but still have time before vested or exercised. Often those are high tech volatile stocks. Brokerages often work with them to execute a no cost collars to lock in the profits. I sometimes used them to lock in profits but for tax plaining wanted to push the stock sale into the following year.
Yeah, like the infamous Microsoft trade... that was fun
Hi Ironchef. Collars can be great initial trades around volatile events such as earnings because of the flexibility to adjust the trades as they evolve. I think I mentioned in another thread, I like to start my trades with a naked put. If the bullish or neutral trend changes and I get put the stock, I will often add a married put and sell a call to finance the long put. Now I have a collar, defined my risk, and have flexibility to adjust and profit from the trade by turning the option legs into credit spreads or rolling out long options for credits.
For me, I don't see the rational in placing initial trades with multiple legs and components all at once. I'd rather have a process for adding and peeling layers as the market changes.
Make sense?
That edge of layering entries and exits specially in options is quantifiable in a proper backtest. Case in point, there was a guy here about 10years ago- options guru with vocab way above mine in terms of options-dgamma,dvega, etc. My head hurts reading his posts. He "works" the fly .. I believe he shorts his ATM straddle first, waits x days to buy the wings. Those extra days moves the fly higher and higher towards 0 in the pnl graph. Thru backtesting one can discern proper spreads to put on , take off on top of other spreads. Quick example.. XYZ nearing an explosion point like near 200d Mvg Avg.. backtest a backspread strategy to see how it performs.. stuff like that.
I knew a guy that did collars on highly volatile stocks for the sole purpose of accumulating a large position. As long as the stock was actually jerking up and down frequently he was able to keep selling his puts at a profit, but another 100 shares with the profit and do it again.
The biggest risk was that the stock stops moving around; then you slowly bleed money.
The biggest risk was that the stock stops moving around; then you slowly bleed money.
why bleed $ though? a collar is theta neutral since he is short call?