Vertical Collar

[Jgills]

Quote from iplay1515:

Thank you Jgills. A very helpful reply.

The folks at CBOE explained the use of the word vertical to mean that the options used in the collar expired on the same date.

Ok, that does make sense. I was under the impression that the dates being the same was a given, but now you've helped me a bit too, so thanks.

Good luck with your trade, make sure you know the payoff structure you get into before making you trade.

 

[JJacksET4]

Quote from Jgills:

Vertical collar is the same name as bull call spread, which is the sometimes just called a collar.

It's called a collar because you're putting a "collar" on your gains and losses. In the vertical call spread, bull call spread, bullish collar, whatever you want to call it, you sell out of the money calls to help finance the purchase of a put option.

I have done many bull call spreads, and have never considered them to be "collars". A Bull call spread involves buying a call and selling a higher strike call - i.e. with a stock at $49, you might buy the 50 call and sell the 60 call. It has absolutely nothing to do with puts!

As far as wording goes, if someone suggests you buy an XYZ (fictional stock) bull call spread, it is good if you can understand what that person is saying.

To reiterate: I have never ever seen this:

Buy a 50 Strike Call
Sell a 60 Strike Call

Called a "collar"

I have also never seen a definition where a "Bull Call Spread" in any way involved a put - you could of course add a put to your "Bull Call Spread", but that is a different matter.

JJacksET4

 

[Jgills]

Quote from JJacksET4:

I have done many bull call spreads, and have never considered them to be "collars". A Bull call spread involves buying a call and selling a higher strike call - i.e. with a stock at $49, you might buy the 50 call and sell the 60 call. It has absolutely nothing to do with puts!

As far as wording goes, if someone suggests you buy an XYZ (fictional stock) bull call spread, it is good if you can understand what that person is saying.

To reiterate: I have never ever seen this:

Buy a 50 Strike Call
Sell a 60 Strike Call

Called a "collar"

I have also never seen a definition where a "Bull Call Spread" in any way involved a put - you could of course add a put to your "Bull Call Spread", but that is a different matter.

JJacksET4

The payout is exactly the same.

The reason you don't see any put options in your bull call spread is because you aren't owning the underlying. If you don't own the underlying there is no need to buy a put.

When purchasing your call for the "bull call spread", which is being finance by the selling of the OTM call, you're already reducing your downside risk because you're only expsoure is the call expiring worthless.

When you own the underlying, you buy a put to receive the effect of only owning a call.

It's the exact same payout structure, one is only owning and selling options (your bull call spread) the other is owning the underlying with a put and selling a call. As I said, what matters isn't the name, but the payout structure.

 

[iplay1515]

The instructor that used the term vertical collar tends to be very precise and very occupied.

The entire matter began as a question about the least expensive method to insure against a gap down on open if you are long on an equity and must hold it overnight.

Any suggestions on the above would also be appreciated.

 

[JJacksET4]

Quote from Jgills:

The payout is exactly the same.

The reason you don't see any put options in your bull call spread is because you aren't owning the underlying. If you don't own the underlying there is no need to buy a put.

Yes, and if I did own the underlying, I wouldn't call the position a bull call spread! If I owned a put, I wouldn't call it a bull call spread, etc, etc.

I'm done with this discussion.

JJacksET4

 

[Jgills]

Quote from JJacksET4:

Yes, and if I did own the underlying, I wouldn't call the position a bull call spread! If I owned a put, I wouldn't call it a bull call spread, etc, etc.

I'm done with this discussion.

JJacksET4

Ok, me too then. My point was that the name doesn't matter, but the payout does- call it whatever you want.

 

[Jgills]

Quote from iplay1515:

The instructor that used the term vertical collar tends to be very precise and very occupied.

The entire matter began as a question about the least expensive method to insure against a gap down on open if you are long on an equity and must hold it overnight.

Any suggestions on the above would also be appreciated.

Are you holding the position for one day? how long are you planning to hold this position that you're worried about a gap down?

 

[iplay1515]

My primary concern is just holding the position overnight and closing it out the next day.

 

[Jgills]

I'm not sure how large your position is, but I'm not in a position to be giving advice. You need to figure out if the cost of purchasing the put and selling the call is worth it. Take into account the commissions involved and the required return on the trade to bring you to breakeven, but I'm heading home from work, good luck.

 

[spindr0]

Quote from iplay1515:

The real intent of the exercise of posting here is to locate valid information about a specific type of option + collar called the "vertical collar". Reading about option + collar is worthless for my purpose unless there is an explanation of a vertical collar contained therein.

A Google search on "vertical collar" + option will now result in 2 relevant hits, both of which are my forum posts here and on T2W.

Remarks that represent rhetoric without meaning are not particularly helpful.

Rhetoric? The first page of any option book's chapter on spreads defines vertical, horizontal and diagonal.

Vertical is redundant when takling about a collar. It is assumed that all components are of the same expiration unless it is stated otherwise.

It might be more productive if you learned option terminology and strategies before ranting about those who have already done so.