Riskless Collar (Part 3)
Posted by Mark on July 6, 2018 at 06:48 | Last modified: January 8, 2018 06:28Today I continue review of another “riskless collar” article by a now-defunct service called ChangeWave Options.
> LONGER-TERM PUTS CAN EQUAL SHORTER-TERM PEACE OF MIND
In my experience, ALL CAPS are a red flag for marketing/advertising material. Have your dissection tools at the ready.
>
> One of my favorite strategies is… a “collar…” spread… that helps
> you to preserve profits on a stock that’s made some significant gains…
>
> …we’re buying put options as the first half of the trade. But the
> second half of the trade… encompasses selling call options against
> those long puts…
>
> For example, a stock that keeps on moving upward is Apple (AAPL).
> To “collar…” 1,000 [shares of] AAPL, which is trading at $181…
>
> 1. Buy 10 AAPL Jan (2009) 180 Puts
> 2. Sell 10 AAPL Jan (2008) 195 Calls
>
> Notice that I went… out into 2009 for the Jan puts at the $180
> strike price. Not only does the long put position protect us from
> a downward move as AAPL moves up, but it does so for a year…
>
> GET ‘SOLD’ ON THE IDEA OF SELLING CALLS AGAINST YOUR PUTS
>
> Notice that we’ve gone with calls that have a closer expiration date.
> The goal with the collar strategy is to collect premium from those
> short calls every month or so as you’re riding this trade till the
> later expiration date of the puts.
This is both the goal and the prerequisite to make this trade profitable. How can this be threatened?
> If you were to sell the AAPL Jan 195 Calls today, you could collect
> $10.80 a share… But here’s the magic: If AAPL doesn’t trade… to
> $195 by… Jan [expiration], this… premium… stays in your pocket.
“Magic” is a great buzzword.
> Assuming these… short calls expire OTM, you keep that money and,
“Assume” is to make an ASS out of U and ME. Look sharp: are we missing something here?
> once again, sell the calls at that strike price (or higher, if the
> stock keeps climbing) each month. You might just be pocketing
> premium again and again!
Sounds great!
> ‘PUT’ THE ‘CALL’ OF EXTRA PROFITS ON YOUR WISH LIST
Sounds really great!
> But back to those long puts — what you pay to buy those puts should
Wait a moment… what about mitigating factors to our plan for selling calls every month?
> come out of the profits you make on the short calls. Those puts are
> going for about… $34,000 to cover your thousand shares…
>
> That insurance may seem expensive, but look at it this way — you
> spend $34,000… to buy those puts, but it’s a one-time expenditure…
> a reasonable “life insurance” contract… for the next year.
We will have to wait until next time to find out about potential barriers to selling calls every month.