Reverse Collars

Quote from optioncoach:

...Since people argue that the vertical is equivalent, why argue he should do one over the other lol. he should trade the way that best matches his approach.
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Coach,

I don't think we are trying to argue that he should do one over the other, we are just trying to understand what his motives are for using one over the other.

A collar is a position which is designed for a single purpose - hedging a long position in the underlying! If you want to speculate on the direction/non-direction and do NOT own the stock already you should use a vertical cause it is a simpler position. Same goes for a reverse collar - if you don't have a short stock position already then why complicate things!?

Obviously, if you leg in piece by piece or initiate one position and then adjust into another and then do more adjustments and end up with a collar then that's a different story, but when your goal from the outset is to have a collar then it makes more sense to trade a vertical, provided you do not have a position in the stock already.
 
Quote from 8_Ball:

Strictly semantics here, but I would argue that the collar/reverse collar are actually the synthetic trades, the bull and bear verticals are the natural trades. It takes more pieces to build the synthetic than the natural.
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Quote from RichardRimes:

huh:confused:
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Stock = 1 leg
Syn stock = 2 legs

Put = 1 leg
Syn Put = 2 leg

Bull vertical = 2 legs
syn vertical (collar) = 3 legs…
 
All interesting comments. Thanks.

MTE mentioned understanding my motives. Well, Coach who has been exchanging comments with me for years has me pretty well figured out and described very well where I'm coming from.

No question that I have a preference for shorting stocks for starters and then building and trimming my hedge around it with positive delta positions such as long calls and short puts.

I would never argue the merits of synthetic equivalents with any of you for one plain simple reason. I have a very limited knowledge of that subject.

But, I do have a pretty solid understanding of vertical spreads. I have looked at thousands of risk graphs on such spreads. This is not to be argumentative, but I will state as a fact that my quasi collar combinations that I have spoken about in this thread do not look anything even closely resembling the risk graph of a vertical spread. So, while I am not arguing, I am admitting that I don't follow what many of you are saying.

Bob

PS. Here's a cute follow up. What should one do if they have a Bear Put Spread (debit vertical) and the short side is exercised early? Answer: Celebrate - you have maxed out early. Just exercise your long side and wipe that silly grin off your face. :p
 
MTE,

All I can say is DUHHHH !!!

Well obviously, what you can do to one side of a synthetic, you can do to the other and have the same result.

LOL. It just wasn't obvious to ME since I was focusing on the trees, not the forest. Thanks for the clear explanation.

Spin
 
Quote from exQQQQseme:


But, I do have a pretty solid understanding of vertical spreads. I have looked at thousands of risk graphs on such spreads. This is not to be argumentative, but I will state as a fact that my quasi collar combinations that I have spoken about in this thread do not look anything even closely resembling the risk graph of a vertical spread. So, while I am not arguing, I am admitting that I don't follow what many of you are saying.
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One thought: Your option modeling program may not factor in the cost of carry thereby making the risk graphs of synthetic equivalents look different. Although I don't think they should look dramatically different as your note implies.

Don
 
Don, what do you mean by "cost of carry?"

Regarding the risk graphs...trust me, there is no similarity. The vertical normally resembles a letter Z or N...not exactly but you guys know what I'm talking about. What I generally come up has curves similar to a straddle.

Now, because I have July Calls long and January Puts short, I agree that I have a synthetic calendar spread. And, yes, the risk graph is identical. But, remember the shorted puts are merely a temporary Vega play. AAPL announces Wednesday, January 17 after market close. I will for sure do something with those shorted puts prior to that time.

Bob
 
Quote from exQQQQseme:

Don, what do you mean by "cost of carry?"

Regarding the risk graphs...trust me, there is no similarity. The vertical normally resembles a letter Z or N...not exactly but you guys know what I'm talking about. What I generally come up has curves similar to a straddle.

Now, because I have July Calls long and January Puts short, I agree that I have a synthetic calendar spread. And, yes, the risk graph is identical. But, remember the shorted puts are merely a temporary Vega play. AAPL announces Wednesday, January 17 after market close. I will for sure do something with those shorted puts prior to that time.

Bob
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"Cost of carry" is the lost interest your cash might otherwise be earning. For example, when your position includes stock you are losing interest on the cash used to buy that stock. If you compare the P/L graph of stock to the synthetic equivalent of stock (long call, short put) the P/L of the synthetic will be lower than the stock. But if you factor in the cost of carrying the stock the graphs should be almost identical.

Anyway, after factoring cost of carry if your risk graphs for synthetics are different than for the native position trust me you are doing something wrong.

Don
 
Don, thank you for the prompt response.

I agree with you completely. That's why I prefer the Reverse Collar to the Regular Collar. So far, with my shorting stocks, I have not had any margin interest charges. On the subject of margin interest charges, I owe 8 Ball a detailed posting on the subject. Hopefully I'll get it posted here this weekend.

Don, when you put on a debit vertical spread, how do you factor in your "cost of carry" for the net debit?

Good trading everyone.

Bob
 
Quote from exQQQQseme:

Don, thank you for the prompt response.

I agree with you completely. That's why I prefer the Reverse Collar to the Regular Collar. So far, with my shorting stocks, I have not had any margin interest charges. On the subject of margin interest charges, I owe 8 Ball a detailed posting on the subject. Hopefully I'll get it posted here this weekend.

Don, when you put on a debit vertical spread, how do you factor in your "cost of carry" for the net debit?

Good trading everyone.

Bob
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Perhaps my term "factor in" implies more complication than I intended.

Anyway I know that my cash earns almost 5%, so any potential profit on any position must be higher or I'm not gambling wisely.

Don
 
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