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Reverse Collars
- Thread starter Eliot Hosewater
- Start date
IV Trader, I apologize for being terse and abrupt in my opening sentence.
I was bothered because I admitted in the prior posting when I laid out the trade that I recognized that this was a synthetic calendar spread. Then, your initial response was to insert a proforma $15 move down. Had you put in a $15 move upward, the result would also have been a disaster. That is why I'm not a big fan of calendar spreads.
Also, in my earlier posting, while I did use the term "consistently profitable", I thought I had made it clear that that I was not speaking specifically about the reverse collar. Actually, I only like the first two legs (a) and (b), and only use leg (c) as part as part of a Vega play, or when the stock has moved down and I am looking to interject some positive deltas into the equation in order to achieve a temporary balance.
Again, I sincerely apologize for the tone of my opening line.
I was bothered because I admitted in the prior posting when I laid out the trade that I recognized that this was a synthetic calendar spread. Then, your initial response was to insert a proforma $15 move down. Had you put in a $15 move upward, the result would also have been a disaster. That is why I'm not a big fan of calendar spreads.
Also, in my earlier posting, while I did use the term "consistently profitable", I thought I had made it clear that that I was not speaking specifically about the reverse collar. Actually, I only like the first two legs (a) and (b), and only use leg (c) as part as part of a Vega play, or when the stock has moved down and I am looking to interject some positive deltas into the equation in order to achieve a temporary balance.
Again, I sincerely apologize for the tone of my opening line.
IV Trader, what I'm doing here is, in my view, an excellent form of Gamma Scalping. Here's what I mean:
1. Let's just look at my legs (a) and (b).
2. Start with (b) and long the Calls of your choice. Although not necessary let's start with ATM calls.
3. Let's assume 2 above resulted in 270 positive deltas.
4. Next short 270 shares and your net deltas will be exactly zero.
5. Adjust each time UNDerlying moves one strike price.
6. Generally, when UND moves one strike price, let's assume $5.00 increments, you will have a net monetary gain as a result of the Gamma effect. I say, "generally", because the two caveats are time (theta decay) or IV (Vega loss). These two caveats should be taken into account when selecting the Calls, in 2, above.
7. This provides an incredible amount of flexibility, which I will be happy to expand upon if anyone is interested.
8. One does not have to be delta neutral. If one is bullish, open the valve a little bit and set the mix to a comfortable level of positive deltas. The opposite is, of course, true if one is bearish.
Summary:
I. Fantastic leverage.
II Complete ability to control risk through delta management.
III If you are familiar with shorting stock this can be done mostly with other people's money.
People spend thousands to attend seminars and don't get this kind of information. I'm happy to provide this for free and all I ask in return are responses, whether or not you agree with me.
Good luck all and have a great trading week.
4Q
1. Let's just look at my legs (a) and (b).
2. Start with (b) and long the Calls of your choice. Although not necessary let's start with ATM calls.
3. Let's assume 2 above resulted in 270 positive deltas.
4. Next short 270 shares and your net deltas will be exactly zero.
5. Adjust each time UNDerlying moves one strike price.
6. Generally, when UND moves one strike price, let's assume $5.00 increments, you will have a net monetary gain as a result of the Gamma effect. I say, "generally", because the two caveats are time (theta decay) or IV (Vega loss). These two caveats should be taken into account when selecting the Calls, in 2, above.
7. This provides an incredible amount of flexibility, which I will be happy to expand upon if anyone is interested.
8. One does not have to be delta neutral. If one is bullish, open the valve a little bit and set the mix to a comfortable level of positive deltas. The opposite is, of course, true if one is bearish.
Summary:
I. Fantastic leverage.
II Complete ability to control risk through delta management.
III If you are familiar with shorting stock this can be done mostly with other people's money.
People spend thousands to attend seminars and don't get this kind of information. I'm happy to provide this for free and all I ask in return are responses, whether or not you agree with me.
Good luck all and have a great trading week.
4Q
Quote from exQQQQseme:
IV Trader...sounds like a plan. I
Finally, IV Trader, as we go down this road, you and the others will quickly see that I am not really doing the defined Collar or Reverse collar. Having participated in these Discussion Boards for many years I long ago came to the conclusion that far too much time is spent on definitions and semantics. To my way of thinking, the definitions and common terms are nothing more than starting points.
Hey Bo...I for one would love to see exactly HOW you do manage a "reverse" collar trade. I don't do collar's and in an IRA a reverse collar is an absolute no no...but it would be interesting to actually "see" how you would manage an actual trade. You are right that on these boards way too much time is spend on talk and very little time on action.
It would be interesting to know how you would manage an AAPL trade gone bad, or any trade of your chosing using real or at least EOD trades. There are many here who would follow with great interest an actual journal in which you demonstrate how you have fun with "reverse" collars.
best RR
Hi Richard. By now it is probably apparent that I RARELY do the normal reverse collars, which is:
Short 100 shares of UND
Long 1 Current Month ATM Call
Short 1 Current Month ATM Put
On some rare occasions such as now, I ironically find myself with a calendarized version of a Reverse Collar. My exact current position on AAPL is:
Short 800 AAPL shares
Long 8 July $85C
Short 8 January $85P
Unfortunately I can't say what my opening prices were because this AAPL thing started in early November with a smaller number of shorted shares and options. What I show above is only the current position, after about 5 or 6 different adjustments.
In that time I had one really bad day, and it was due to extenuating circumstances. That day was December 27, 2006, a Wednesday. The day before, Tuesday, December 26, AAPL went way down and I did quite well because of the configuration I had on that day. I was on vacation in Montana and was only able to spend a few minutes online. Between the time zone difference and other personal matters, I decided to leave my heavy negative delta position alone.
On December 27, between missed plane connections, etc. and a miserable trip back to Miami, I didn't get home until the wee hours of the morning. AAPL had recovered and I gave back all I had made. Without going into full details, I'm human and when I finally got back online mid day Thursday, I made a few small but dumb mistakes. Other than that, AAPL has been real good to me.
Back to the collar. I have a general rule which covers all of my options trading. That rule is: NEVER SHORT OPTIONS UNLESS THERE IS A COMPELLING TEMPORARY REASON TO DO SO.
My reason is: Shorting options creates negative Gamma. I hate negative Gamma.
So, some of you might ask, why do I presently have a position which is in fact a synthetic calendar spread and also has a net negative Gamma? The answer is, as I have stated in previous postings is due solely to the present IV spike in the January options. I opened the present short positions on the January $85P's late last week and the present IV is about 10 points higher than usual. Even so, I am not thrilled with this. A slow move in either direction will be ok; however, a significant Gap up or Gap down will hurt. (I need to be honest with you guys in order for this to have any meaning or value.)
8 Ball - sorry I misunderstood your question. What you are now asking is how does one effectively manage an account when shorting stocks in order to either minimize or eliminate the interest charge? Great question. I'll try to put together something meaningful in the next day or so. Meanwhile, study your own brokerage account and pay particular attention to some of the obscure numbers on your Balances page. Also, if you have time, check with your broker and be sure you understand what they mean by Adjusted Cash Balance.
This is not a simple question to answer. Nevertheless, if one is going to short stocks, a solid understanding of the rules is an absolute necessity. One final thing on this subject now. I short my stock in an account that has a solid mutual fund portfolio. While I never put that portfolio at risk, the net value is used by the broker as net equity for purposes of determining the amount of stock they will allow me to short. It has nothing to do with the interest charge, just in the amount I am able to short stock.
As I say, it is not simple. I would be lying to say otherwise.
4Q
Short 100 shares of UND
Long 1 Current Month ATM Call
Short 1 Current Month ATM Put
On some rare occasions such as now, I ironically find myself with a calendarized version of a Reverse Collar. My exact current position on AAPL is:
Short 800 AAPL shares
Long 8 July $85C
Short 8 January $85P
Unfortunately I can't say what my opening prices were because this AAPL thing started in early November with a smaller number of shorted shares and options. What I show above is only the current position, after about 5 or 6 different adjustments.
In that time I had one really bad day, and it was due to extenuating circumstances. That day was December 27, 2006, a Wednesday. The day before, Tuesday, December 26, AAPL went way down and I did quite well because of the configuration I had on that day. I was on vacation in Montana and was only able to spend a few minutes online. Between the time zone difference and other personal matters, I decided to leave my heavy negative delta position alone.
On December 27, between missed plane connections, etc. and a miserable trip back to Miami, I didn't get home until the wee hours of the morning. AAPL had recovered and I gave back all I had made. Without going into full details, I'm human and when I finally got back online mid day Thursday, I made a few small but dumb mistakes. Other than that, AAPL has been real good to me.
Back to the collar. I have a general rule which covers all of my options trading. That rule is: NEVER SHORT OPTIONS UNLESS THERE IS A COMPELLING TEMPORARY REASON TO DO SO.
My reason is: Shorting options creates negative Gamma. I hate negative Gamma.
So, some of you might ask, why do I presently have a position which is in fact a synthetic calendar spread and also has a net negative Gamma? The answer is, as I have stated in previous postings is due solely to the present IV spike in the January options. I opened the present short positions on the January $85P's late last week and the present IV is about 10 points higher than usual. Even so, I am not thrilled with this. A slow move in either direction will be ok; however, a significant Gap up or Gap down will hurt. (I need to be honest with you guys in order for this to have any meaning or value.)
8 Ball - sorry I misunderstood your question. What you are now asking is how does one effectively manage an account when shorting stocks in order to either minimize or eliminate the interest charge? Great question. I'll try to put together something meaningful in the next day or so. Meanwhile, study your own brokerage account and pay particular attention to some of the obscure numbers on your Balances page. Also, if you have time, check with your broker and be sure you understand what they mean by Adjusted Cash Balance.
This is not a simple question to answer. Nevertheless, if one is going to short stocks, a solid understanding of the rules is an absolute necessity. One final thing on this subject now. I short my stock in an account that has a solid mutual fund portfolio. While I never put that portfolio at risk, the net value is used by the broker as net equity for purposes of determining the amount of stock they will allow me to short. It has nothing to do with the interest charge, just in the amount I am able to short stock.
As I say, it is not simple. I would be lying to say otherwise.
4Q
Quote from exQQQQseme:
Daddy's Boy,
I believe in leveraging and hedging. While the subject of this thread is "Reverse Collars", I got involved because Eliot asked me to (see the first posting on page 1) and I felt I had something meaningful to contribute. My favorite way to trade is the combination of short stock and long calls, with an occasional use of shorted puts. My experience is that this is: (a) easy, (b) fun, and (c) consistently profitable. But, for sure it is not the only fish in the pond, so I don't see the need to compare to a synthetic equivalent or otherwise.
Thanks for your postings, especially the math correction.
4Q
Perhaps this was the post I should have referred to...."short stock and long calls with occasional use of shorted puts. My experience is that this is a) easy b) fun and c) consistently profitable"
I guess I'm a little skeptical that it is easy or even consistently profitable and was asking since you implied by that post this is a frequent trade it would really be helpful to provide this community with a specific.."real" time example.
Ok now I'm beginning to understand ...you rarely actually put on your "favorite" trade.