Married puts and Collars Strategy

L

lowvoltrader

Married Put or Collar trading strategy --- big picture

1. buy stock and just ITM put about 4 months out, where max risk (equal to time value in put) is one fourth of a strike difference (example if srikes are 5 apart, max time value is 1.30.

2. in the first month, look to sell call only to offset one months theta on the put, and only if stock appears to be dropping or sitting. If stock is rising let it continue (don’t cap your profits).


3. roll up the puts if a) the stock moves up at least one strike and b) the cost (of selling current put and rolling up) is one fourth of the strike difference as above. Example if a) the stock has moved up 5 or more points, and b) the current put is currently priced at 3.10 and the next higher strike put is 2, then do not roll. But if the next higher strike put is 1.80, then roll.

4. if the stock falls and you believe it’s temporary (no huge decline), sell the puts for a profit and use the money to a) buy more shares and a new put. The idea here is you are averaging down (buying more shares at a lower price along with currently owned shares, reduces the average price paid). Then if the stock rebounds you own more shares and can makes a significantly larger profit with profits partly paid for ny the market.

5. If the stock does not move in two months of establishing original position, (or if it falls, you buy more shares and roll out the puts), then close the position within 2 months.

6. the idea here is that you are looking for stocks that go up, but if in case you are wrong (stock does not move much or moves down, then the long put and short call will reduce any losses below that of a long stock only or long call only trader. Theoretically your results would almost always exceed that of a covered call strategy as you allow for unlimited upside profits by not selling the call right away (and only if any upside move slows or retraces). Also you lock in upside profits by ratcheting up your protection as the stock moves up.

I believe the above is similar to the strategy pioneered by Peter Achs of Optionetics. I appreciate any comments especially on a) whether the strategy appears to have a long term positive epectation or edge and 2) on parameters used for buying the stock or choosing the options. Joel
I appreciate any comments
 
My two cents is that you can set up all kinds of elaborate option strategies but there is no edge because there is always a market result that can defeat the strategy - apart from the inherent slippage.

Other than the dumb luck of being long in an up market or short in a bear, the only way that you can beat it is your own timng and selection.

Hedging are good but some personal ability is necessary to make it work. No cookie cutter approach is infallible.
 
Quote from lowvoltrader:

Married Put or Collar trading strategy --- big picture

1. buy stock and just ITM put about 4 months out, where max risk (equal to time value in put) is one fourth of a strike difference (example if srikes are 5 apart, max time value is 1.30.

2. in the first month, look to sell call only to offset one months theta on the put, and only if stock appears to be dropping or sitting. If stock is rising let it continue (don’t cap your profits).


3. roll up the puts if a) the stock moves up at least one strike and b) the cost (of selling current put and rolling up) is one fourth of the strike difference as above. Example if a) the stock has moved up 5 or more points, and b) the current put is currently priced at 3.10 and the next higher strike put is 2, then do not roll. But if the next higher strike put is 1.80, then roll.

4. if the stock falls and you believe it’s temporary (no huge decline), sell the puts for a profit and use the money to a) buy more shares and a new put. The idea here is you are averaging down (buying more shares at a lower price along with currently owned shares, reduces the average price paid). Then if the stock rebounds you own more shares and can makes a significantly larger profit with profits partly paid for ny the market.

5. If the stock does not move in two months of establishing original position, (or if it falls, you buy more shares and roll out the puts), then close the position within 2 months.

6. the idea here is that you are looking for stocks that go up, but if in case you are wrong (stock does not move much or moves down, then the long put and short call will reduce any losses below that of a long stock only or long call only trader. Theoretically your results would almost always exceed that of a covered call strategy as you allow for unlimited upside profits by not selling the call right away (and only if any upside move slows or retraces). Also you lock in upside profits by ratcheting up your protection as the stock moves up.

I believe the above is similar to the strategy pioneered by Peter Achs of Optionetics. I appreciate any comments especially on a) whether the strategy appears to have a long term positive epectation or edge and 2) on parameters used for buying the stock or choosing the options. Joel
I appreciate any comments
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Congratulations, nice summary except for point 1, buying the itm put (giving you a synthetic otm call) - should be an otm put (giving a synthetic itm call and thus a higher delta).
To answer your questions:
1. the strategy works well if the underlying moves as you want it to - if it doesn't, then you'll probably lose money (just like any other strategy).
2. the strategy works well if you choose the stock well and the options well. These decisions of course depend on the stock cooperating with your predictions.
Pretty wishy washy answers but I'm afraid that is how it is. IOW the collar strategy is no better/worse than any other strategy that is being used appropriately (read right time and right place), whether it's a synthetic or options only.
The next question you might want to ask is 'why not trade the dynamic bull call/put vertical instead of the collar' :).
db

P.S. Peter Achs didn't 'pioneer' the dynamic collar strategy, lol.
 
Quote from lowvoltrader:



3. roll up the puts if a) the stock moves up at least one strike and b) the cost (of selling current put and rolling up) is one fourth of the strike difference as above. Example if a) the stock has moved up 5 or more points, and b) the current put is currently priced at 3.10 and the next higher strike put is 2, then do not roll. But if the next higher strike put is 1.80, then roll.
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Not quite correct.
3.10 minus 2 equals 1.10. Therefore you roll (anything less than 1.30 for a 5 point spread you roll up).
The roll is the purchase of the bear put spread - you sell the lower strike put (the one you own) and buy the higher strike put (the one you want to own) for a debit of 1.30 or less (~25% of the strike separation, so for a 10 point spread it would be 2.60 or less).
db
 
thanks for the responses especially daddysboy. he pointed out an area to correct; when rolling up the put, the trader would be selling aless expensive lower strike put and buying a more expensive higher strike put which obviously would be for a net debit. for example if rolling up five point strikes and a current put value of 3; the trader would be willing to pay up to 4.30 for the next five point higher strilke put.

Although some comments focused on stock selection, I believe that long term, they may be incorrect. there are two academic studies by David Hamernik a finance professor at FSU that show excess returns to a long term strategy of buying the 30 day synthetic stock (long call and short put ATM) which is very similar to a long term strategy of being long stock and long put (a synthetic long call). a link to one such study is here: http://dscholarship.lib.fsu.edu/undergrad/145/ however a search on "hamernik options" will turn up both studies. Juist as the markets have a strong long term bullish bias, there appears strong evidence that a long term synthetic call buyer may significantly outperform the market. ..... Joel
 
The Hamernik study makes sense. You would participate in the long term bullishness of the market (S&P500 is about 12% isn't it?), plus you can make interest on the money you didn't spend on buying the stock. Of course there is always the "short term" risk of a bear or stagnant market, which might be years.

[Note - I haven't read the study yet.]
 
the two hamernik studies showed significantly positive results from buying the 30 day ATM call and selling ATM put (which is synthetic long stock. you own a cheap call if the markets bullish; keep some time decay from your short put if the market sits there; and only lose big if the market tanks. however i believe the married put and collar strategy betters this (and was not tested by the author). the idea of the MPC strategy is to paticipate fully in bull moves, offset time on your long option with a short option when the market's sitting; and be totally protected against a downside move if it occurs. indeed you "dollar cost average down" with down moves, a time honored way of amassing more shares and having the market pay you to average you (by selling your long puts at a profit) is icing on the cake. i am interested in anyones trading results whos actually carrying out this strategy....
 
Quote from lowvoltrader:

i am interested in anyones trading results whos actually carrying out this strategy....
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That would be me. It's working fine so far but as I said earlier, the trick is in managing the position - when to roll, where to roll to (strike and month), just roll the put/call or do you use a credit/debit spread (and leave the long/short options alone) to adjust etc etc.. There are more nuances to this strategy than you could possibly imagine.
db
 
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