Reverse Collars

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Eliot Hosewater

I'm starting this thread to discuss reverse collars mentioned by "4Q" (borankin), our visitor from the Optionetics board.

I got into holding some short stock when I had a couple of Iron Condors go north on me. I wound up short 100 shares of GOOG, and 500 shares of AMZN. I tried reverse collars, but couldn't work them correctly.

I know with GOOG I kind of panicked on expiration day for the IC. I closed it early in the day and byt the end of the day the stock had moved another strike price away, so I was already in a hole when I put on the RC. I was afraid I wouldn't be able to sell the long IC legs.
 
Thanks Eliot. Let's kick off with the definition of a reverse collar.

It is the opposite of a regular collar (buy stock, buy puts, short calls to finance the long puts):

1) Short the stock
2) Long the Calls
3) Short Puts

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Further on the definitions:

(1) and (2) combined are known as a married call.
I recall that several years ago George F told me that this combination was a synthetic put.

(1) and (3) combined are known as a covered put write.

I think that (2) and (3) together are a synthetic long position on the stock.

That having been said...synthetic, schminthetic, let's help eachother make some money.
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Hopefully this is a good beginning. There's so much to be said.

4Q
 
reverse collar (a bearish position) implies otm options, i.e. your position is short stock plus an otm short put plus an otm long call. This gives you a synthetic bear put spread. If you use itm options then you end up with a bullish trade, i.e. a synthetic bull put spread. A regular collar, otoh, is a bullish position (synthetic equivalent is a bull call or bull put spread).
Daddy's boy
 
Quote from daddy'sboy:

reverse collar (a bearish position) implies otm options, i.e. your position is short stock plus an otm short put plus an otm long call. This gives you a synthetic bear put spread. If you use itm options then you end up with a bullish trade, i.e. a synthetic bull put spread. A regular collar, otoh, is a bullish position (synthetic equivalent is a bull call or bull put spread).
Daddy's boy
More...

You mean call below/put above strike price? I guess yoyu could do that with a normal collar too.
 
OK, we're off to a great start and I thank everyone who contributed. Actually, I don't look upon this strategy as being either bullish, bearish, or neutral. One simple reason...I adjust my trade each time the underlying moves to a new strike price. By the way, the key is in the adjustments and my Reversals often change dramatically. Much more will be said about this in future postings. Reason I like this strategy so much is because I am in control. On the good days I take the credit for the success and on the bad days I don't have to look far to know who to blame.

Also, much of what I know on this subject comes from what I have been able to extract from Scott Kramer and Peter Achs of Optionetics. I say this not to provoke anyone, but only in the interest of full and honest disclosure.

By the way, since this strategy involves shorting stock, there are a few caveats that need to be said right at the start:

(1) You have to know exactly how your broker computes the margin interest charge and you have to manage your account balances to either minimize or eliminate this charge.

(2) Most, if not all, brokers do not allow shorted stocks in an IRA, 401(k), or any other kind of deferred tax account.

(3) Shorting stocks in any strategy just about precludes any dividend paying stock because of the ex-dividend date issue.

(4) Shorting stocks generally involves large caps because the broker must have an availability of shares in its customer accounts to be able to lend you for shorting purposes.

So much more can, and will, be said on this fascinating subject. However, for now I'll stop here and let you guys and gals chime in.

4Q
 
8 Ball, to partially answer your question. Regarding the shorted puts let me say...

(1) I don't always have shorted puts, because their only purpose is to help defray the expense of the long calls.

(2) When I short puts, I short them ATM because as we both know, the extrinsic value is always greatest At The Money. My thinking is the main reason for shorting any stock is to profit from theta decay of extrinsic value.

(3) Regarding the calls, I am generally at the money; however, in this regard am very flexible and don't follow any hard and fast rules.

(4) As you know, I'm a CPA. Thus my accounting background prompts me not to regard the purchase of an option as an expense. I regard it as the purchase of an asset. The expense lies in what I refer to as the amortization of the extrinsic value. In options parlance this is the Theta decay.

4Q
 
Quote from Eliot Hosewater:

You mean call below/put above strike price? I guess yoyu could do that with a normal collar too.
More...
Yes, same can be done with the regular collar, turning it from a bullish to a bearish trade.
daddy's boy
 
Regular Collar vs Reverse Collar....One principal advantage of the Reverse: It's much cheaper. In the end it's about which alternative produces the highest annual percentage return. Based on my experience it's a no brainer.

Other than the amount of the downstroke, the flexibility of the two is the same.
 
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