Option FanaticOptions, stock, futures, and system trading, backtesting, money management, and much more!

Riskless Collar (Part 3)

Today 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.

No comments posted.

Leave a Reply

Your email address will not be published. Required fields are marked *