What is the proper way to set up a Collar?

[dagnyt]

Quote from crgarcia:

You first determine how much you think the market will go up, sell the corresponding Call, then see how close a put you get for the money you got?

Or you first measure your risk tolerance, buy the put, and sell a Call option worth the same?

Any other tips fro improving Collars?

To improve the collar, trade the equivalent position instead.

a) Sell the put with the same strike and expiration as the call you planned to sell.

b) Buy the same put you would have bought.

This is the short put spread and it has the same risk/reward profile as the collar.


As far as planning the trade is concerned, it may be easier for you to think of when to trade each leg when there are only two of them, instead of three.

Mark

 

[MTE]

Quote from dagnyt:

To improve the collar, trade the equivalent position instead.

a) Sell the put with the same strike and expiration as the call you planned to sell.

b) Buy the same put you would have bought.

This is the short put spread and it has the same risk/reward profile as the collar.


As far as planning the trade is concerned, it may be easier for you to think of when to trade each leg when there are only two of them, instead of three.

Mark

Call vertical...put vertical...same difference. Once again, if you already own the stock then the spreads are irrelevant.

 

[Hester]

Quote from exQQQQseme:

Why do a collar in the first place? Why not do a debit call spread? It's synthetically the same and requires a hell of a lot less cash up front?

4Q

a collar is a stock play, its mainly for hedging downside risk in a stock you already own. It doesn't require any cash if you already own the stock. And if you don't own the stock, then yes its more capital intensive but you have defined maximum loss. Its basically a conservative call spread if you don't already own the stock.

But, With a debit call spread you have to worry about the greeks. With a collar you really don't have to worry much. If you implement a collar and the stock is stays put, you don't lose anything. But if your call spread is out of the money then you lose everything. big difference. Its basically just a bracket order that a stock can't gap through and that will give some time for the stock to reverse rather than immediately selling once the stock hits the stop order.

 

[spindr0]

Quote from crgarcia:

What if something unexpected happens (like 9/11) and you don't have enough time to close your position (sell) fast enough?

What if the market actually opens sharply lower?

If you're and Elite Investor, since chit happens, do the collar. If you're an Elite Trader, get out of Dodge daily

 

[spindr0]

Quote from Hester:

But, With a debit call spread you have to worry about the greeks. With a collar you really don't have to worry much. If you implement a collar and the stock is stays put, you don't lose anything. But if your call spread is out of the money then you lose everything. big difference. Its basically just a bracket order that a stock can't gap through and that will give some time for the stock to reverse rather than immediately selling once the stock hits the stop order.

I don't think that it makes much of a difference. If the positions are syntheticlly equivalent, the results will be pretty much the same other than:

a) A realized option loss versus a paper loss (equity) if the vertical loses, or

b) With a BEEEG drop below the lower strike, you're going to have a realized gain from the put component of the collar versus a much smaller realized loss on the vertical, unless you close the equity position

6 of 1, 1/2 a dozen of the other

 

[MTE]

Quote from Hester:

a collar is a stock play, its mainly for hedging downside risk in a stock you already own. It doesn't require any cash if you already own the stock. And if you don't own the stock, then yes its more capital intensive but you have defined maximum loss. Its basically a conservative call spread if you don't already own the stock.

But, With a debit call spread you have to worry about the greeks. With a collar you really don't have to worry much. If you implement a collar and the stock is stays put, you don't lose anything. But if your call spread is out of the money then you lose everything. big difference. Its basically just a bracket order that a stock can't gap through and that will give some time for the stock to reverse rather than immediately selling once the stock hits the stop order.

A collar is not a "conservative" call spread, it is a call spread. It's the same thing.

With a debit spread, or credit spread for that matter, you don't have to worry about the greeks more than you have to worry about them in a collar.

If the stock stays put then your loss in a collar is exactly the same to the loss in a spread. Once again, the two are exactly the same position.

If your call spread is OTM then your put in a collar is ITM (remember that you are using the same strikes in both positions). And if your put is ITM then you have a loss on the stock.

 

[Tom1am]

Something to consider: IRA's, 401ks, HR10 plans, and other types of plans generally do not allow spreads. so the investor is limited to what they can trade.

In taxable accounts collars may be subject to different tax rules that may make the spread superior.

 

[dagnyt]

Quote from Hester:

a collar is a stock play...

But, With a debit call spread you have to worry about the greeks...

With all due respect, you really ought to take the time to gain a better understanding of what it means when positions are equivalent.

That understanding will translate to cash in your pocket.

Mark