My strategy to earn money with no risk.

Here is my thought on the follow up action. It could easily be flawed so feel free to comment.

A few days ago you could have put one of these trades on in TEX and recieved a premium on the Jan 07 45 call of $5.59 ($7.80 - $2.21 ITM). Now lets say in the next three months the stock goes to $35. I have not lost any money because of the Put and now the 45 call is worth pennies.

But, (and I realize I am assuming all else equal ) let's say the 35 call has a premium on it of $4.50 so I sell it. I still have the Put so I do not have to buy that again so I get to keep the whole $4.50 I bring in on the call. The original profit potential was $2.19 and now the locked in profit is $4.50. I am better off than I was.

I do still have the risk of the old uncovered calls so I may decide to buy them back. As long as they are $2.31 or less I am actually better off than I was to begin with.

What do you think?

boots
 
A little follow up.

First I have not directly answered everybodies questions but I think I have answered them all indirectly. If not then I would be glad to.

Second, it appears to me the real opportunity in options is being able to perceive what will happen to a structured trade (ie: collars like we have been talking about) during the duration of the trade. So many of the tools and talk is based on what happens at expiration. Can somebody point me to some tools that might help me see what happens during the trade.

Using the TEX trade I described earlier is a good example. Where can I find help in determining what the 35 call might be worth three months from now if the stock went from 45 to 35.

thanks,

boots
 
I may have answered my own question. Tradestation has a pretty good Option Modeler and it tells me that all else being equal if TEX drops to $35 in three months the Jan 07 35 call will be worth $3 more than the $45 call. So if TEX drops to $35 in the next three months I can buy the 45 call back and sell the 35 call and lock in a $3 profit instead of the $2.19 current profit.

If this is correct then my assumption is good and I am actually better off if the stock does drop. So the trade started with a 9.15% potential return and that may actually be the least it will make if the trade is managed properly. ( managing it properly may be the operative phrase.....hehe)

boots
 
boots,

Nothing teaches like experience, so I think I might put on one or two of these to see how it goes.

Do you ever roll up your puts if the stock goes up?

BTW, I think you were saying that the main goal of your strategy is to maximize your worry-free fishing time.
 
Hosewater,

Hey, that would be great. Keep me informed. I would like to see how you handle them. Maybe I can learn something.

As for rolling up the Put, I have never done that. I have done some long phase leg-ins, putting on the write and then waiting for the stock to go up and buying a Put above the Call. This works great and then you only have to buy the put once. Problem is you have downside risk until the Put is added and that can affect your casting right at the moment you see that fish you have been looking for all week.

boots
 
Quote from boots:

I may have answered my own question. Tradestation has a pretty good Option Modeler and it tells me that all else being equal if TEX drops to $35 in three months the Jan 07 35 call will be worth $3 more than the $45 call. So if TEX drops to $35 in the next three months I can buy the 45 call back and sell the 35 call and lock in a $3 profit instead of the $2.19 current profit.
More...

Boots,

Again, I haven't looked at the numbers yet but here's a quick assessment:

Your initial collar is a bull put/call vertical.

The underlying moves against the position, so the bull put vertical will be showing a negative running PnL ignoring vega issues.

You then sell a bear call vertical which is potentially completing a box or offsetting the synthetic vertical locking in a loss not a gain.

Bear in mind that your initial position is bullish/neutral depending on strike selection. Does it seem reasonable to you to be able to lock in a profit after an unfavorable move?

As I hinted in the earlier post, your long stock and long put is a synthetic call. When the underlying drops, this synthetic call will lose value just like a natural call. It's a common mistake to think you will not lose any money with a long stock and long put position when the underyling goes down.

I haven't had a chance to look at some real numbers or model the position but if I get a chance I will do so and try and make things a little clearer. With LEAP option prices, anything is possible.

Good luck.

MoMoney.
 
>It's a common mistake to think you will not lose any money with a long stock and long put position when the underyling goes down.<


I will admit I am making that mistake. I can understand that if you buy a put and a stock and the stock goes down you are losing the Time value of the Put and therefore losing money. But if the total cost of the Put has been offset in the equation by the sale of the call then I do not understand how the Put does not provide 100% downside protection in these collars.

thanks for the help,

boots
 
Quote from boots:

>It's a common mistake to think you will not lose any money with a long stock and long put position when the underyling goes down.<


I will admit I am making that mistake. I can understand that if you buy a put and a stock and the stock goes down you are losing the Time value of the Put and therefore losing money. But if the total cost of the Put has been offset in the equation by the sale of the call then I do not understand how the Put does not provide 100% downside protection in these collars.

thanks for the help,

boots
More...

Why do people put on collars if not for downside protection?
 
It's true on collars for a credit where the call sold covers the TV in the put it is locked in profit no matter where the stock goes, but it depends on how you manage or don't the position. As has been stated, it's basically collecting interest on the cash that could have been sitting in the bank. The thing is, unless the call you sold has a bigger delta then the synthetic (which means going ITM in most cases), you won't make money on the way down, of course you won't lose any as far as the position is concerned.

As for rolling the calls down, let's say XYZ is at 50 and you buy the ATM puts for $3 and sell the 55 calls for $4. $1 guaranteed profit. XYZ tanks to $40 and now the 55s are worthless and the 50s are trading at parity. You lose $10 on the stock + $3 in TV for the put, but gain $10 in intrinsic for the put and $4 for the call. Your profit is $1 as expected. The problem is, once you buy that call back and resell at the lower strike, your delta from stock is +1, offsetted by the put at -1, making it 0, and when you sell those calls at 40 for say $2 and -0.5 delta, you now have a position that is -0.5 delta. Which means if the underlying rises, you lose.

So when XYZ rises to $45, you gain $5 on the stock, let's say you lose $5 on the put, and say the 40 calls are worth $5 meaning you lost $3, you have a net loss of -$2. This is of course a very rough example. I would say the better solution is to roll the puts down and reestablish the collar there. One major thing you have to watch your for in your strat is that the call sold at the beginning of the position is going to cover the TV in the put and whatever price difference between the stock and the put strike. If not, you are looking at a loss scenario if the stock falls.

I'm pretty sure this is what momo was trying to say.
 
Why didn't you analyze one of boots' real life examples?

Like this one?

WLP @77.44
Sell Jan 07 75 call for $7.9
Buy Jan 07 72.5 put for $2.9

You notice that the credit from the collar is 5.00 while the difference in strikes is 2.50, and both strikes are less than the current stock PPS.

I don't think he would make the trade on XYZ with those numbers.

I'm too tired tonight, maybe I'll look at it tomorrow.
 
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