Ratio collars; anybody tried this?

C

China man

Ratio collars with shares or ratio spreads?
Let's say you Buy a 108 call on SPY sell the shares short and sell 2 105 puts for a net debit of zero.

It seems like these do work as long as you get out before the sold legs become ITM, although I have not tried this.

Conversely, when the ratio becomes 3 to 1 it seems as if it would actually be better to sell one near the money option and buy 3 out of the money options to cover your shares, although this is riskier becuase the market must move substantially in the direction you have speculated or againts the sold position. Small movements in the direction the trader have planned will result in losses on the shares.

Any thoughts?
 
Chinaman--interesting, but questionable strategy.

Obviously, you are flat to the upside (if you hold to expiry) because you're hedged against losses on the short by the call.

To the downside, you have a chance to make a profit in a fairly narrow zone between 105 and 108. Unfortunately, these days the market can and will move 1 full point on any given day. If you are doing these in the front month (Nov), even a modest move down right away will cause the 105 puts to gain in value substantially wiping out much of the gains on the short.

You are really hoping for a very slow drift downward with this strategy. In that event, you could have limited profits.

On the other hand, there is a very limited maximum gain--only 3 points at best, and frankly that is extremely unlikely because the 105 puts will retain value right up to expiry. Also, you will have a noticeable margin requirement because of the extra put, which relates also to the possibility of substantial losses in the event of a nasty gap down. I don't do naked options for both of these reasons. I could be corrected on this since I don't do them, but I'm guessing the margin on this trade is about 20 points for a maximum potential gain of around 15%.

You are right to think that if the market dips below 105 you should jump out with whatever the market has (or has not) given you.
 
As John indicated, maximum gain attained only with that perfect expiration at 105. Anywhere else, much les, particularly before expiration.

Synthetic equivalent of ratio spread is better approach (less slippage amd commissions). As he noted, the margin on that will be 20 pts (don't know if the equity synth is the same).

If you're looking for that perfect expiration, go with a calendar. At least if the market moves significantly against you (gap), it won't hurt you anything like a ratio write will.
 
As the market stands now on November SPY;

You could buy one 102 put to cover the sold 105 put.

-100 SPY @ 108.08
+1 108 Call
-2 105 Puts
+1 102 Put

Net debit of about 56 cents, but with intrinsic of 8 cents, total risk is 48 dollars before commissions, about 5 bucks at IB.

Max gain: 300 dollars
Max Loss ~ 53 after commissions.

It is about a one to six risk/reward ratio, but the statistical probability of a max gain is highly limited.
 
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