Collar Funds Stocks For Collars How to trade Collars
Post on: 18 Июнь, 2015 No Comment
By comparing the simple Risk-Reward Values, the Debit Collar appears to be the better trade over the Standard Collar:
Standard Collar (Example #1):
Maximum Risk = $3.50 (7.2%). % if Assigned = 3.1%
Debit Collar (Example #2):
Maximum Risk = $1.00 (2.0%). % if Assigned = 7.8%
In the Debit Collar spread the investor is risking a much lower amount while having a higher % if Assigned return. However, in order to achieve the higher return stock XYZ would have to be trading above $55.00. For the Standard Collar, the stock only needs to be trading above $50.00 for the trade to earn 3.1%. The Debit Collar offers a much greater protection and lower monetary risk, but there is also a lower probability of earning the higher return. Each investor will have their own personal Risk-Reward tolerance as to what the wish to risk, what type of return they want to achieve compared against the probability of making that return.
In addition to adjusting the Call and the Put strike price for a Collar trade on a given stock, some investors like to purchase the Put option further out in time from the sold Call. This is due to one of the fundamental rules of options investors: Investors will increase their annualized return when they sell month by month, and will decrease their annualized cost if they buy an option further out in time. If an investor was planning on holding the stock for a 3, 6 or 12-month period, they might be able to lower the cost of protection by purchasing a Put that is 3, 6 or 12 months out in time.
Let’s look back at example #1, the Standard Collar:
Buy stock, Sell ATM — OTM near month Call, Buy OTM Put in same month
- buy 100 shares of stock XYZ @ $49.50.
- Sell to Open 1 month out 50 strike Call for $1.50
- Buy to Open same month 45 strike Put for $0.50
Let’s say we were planning on holding the position and trading a Collar spread against the stock every month for the next 6 months (180 days). Assuming that the stock stayed at the same price for 180 days and the one-month out options remained at the same price, we would roughly collect $9.00 in Call premium ($1.50 for each month over 6 months) and we would have paid $3.00 in Put premium ($0.50 * for each month over 6 months).
Right now, the 6-month out (180 days to expiration 45 strike Put is only trading for $2.00. Buying the far out Put today would potentially save the investor $1.00 in premium over the 6 month period. Normally, this type of Collar is similar to the Debit Collar as you may end up paying more for the far out Put then you receive for the near term Call.
Collar trade, Put farther out in time (Example #3):
Buy stock, Sell ATM — OTM near month Call, Buy 6 month out OTM Put
- buy 100 shares of stock XYZ @ $49.50.
- Sell to Open 1 month out 50 strike Call for $1.50
- Buy to Open 6 month out 45 strike Put for $2.00
