Riskless Collar (Part 4)

We pick up today on the hunt for some full disclosure about the collar trade.

     > Once you collect that $10,800 on those AAPL Jan 195 Calls, you’ve
     > started profiting on the collar, as you’ve brought your investment
     > down to $23,200. Remember, as long as the stock stays above the…

Wrong. I don’t profit on the collar until I’ve paid off the put (and transaction fees).

     > [put] strike price… you will be selling calls against them, and
     > that’s money you take in every time you initiate a new trade.

Money I “take in” is not net profit.

What about mitigating factors to my plan for selling calls every month?

     > All things being equal in this example, if you took in $10,800 a

“All things being equal” is qualification for additional details not given. And there are additional details: mitigating factors to selling calls every month. Complete risk management is an essential component of any viable trading plan.

     > month during the next 12 months, you could collect $130,000 in
     > that time — a profit of nearly $100,000 after you subtract the
     > initial investment in the long puts.

What must I do to prevent/manage the possibility of losing over $30,000? What is the likelihood of profit/loss? These are the key questions I need answered in order to actually evaluate this trading strategy.

     > COLLARS CAN KEEP GREAT INVESTMENTS ALIVE, THRIVING
     >
     > 1. The long-term put provides downside protection…
     >
     > 2. You cap… upside potential by… the short-term call sale.
     >
     > 3. You could generate monthly income with the sale of OTM calls.
     >     Or, you could buy back the call (between expirations) and roll
     >     it up to a higher strike price if the stock moves farther and
     >     faster than you had anticipated.
     >
     > But what would happen if the stock went down? Simple. Those long AAPL

In a cursory manner, he finally addressed a challenge to serial call sales. As a result, what he writes sounds great but is simply not reality. It’s an alluring tale for unknowing beginners—a prime target audience for newsletters and investment services. Once their money is on the line they are destined to discover what may be a very different, unfortunate truth.

     > Jan (2009) 180 Puts would expire worthless if the stock kept
     > going up, but if shares pulled back to $180 or lower by Jan
     > 2009 expiration, you could collect the [available] premium…
     >
     > That way, if you lost… on the stock, you could come out better
     > off than… if your shares dropped and you… [had no] protection.

Moderate (less than the cost of the put minus the initial short call) downside is another risk he fails to address.

     > Now, I know some of you might have gotten nervous about the
     > short calls because of the risk of assignment…

Yes!

     > But remember, you have the shares… so if you were assigned
     > to provide 1,000 shares of AAPL [that you bought for $181,
     > then] you’d be paid $195… a $14/share profit.

This does not address the threat.

     > And since you were planning on riding the stock up to that level
     > anyway, the work of closing a position might just be done for you!

This sounds deceptively great because much of the story has gone untold.

     > Jon “Doctor J” Najarian
     > Editor
     > ChangeWave Options Insider

Put this guy on the huckster list. He’s still around, too. Buyer beware… optionScam.com.