What is a Collar Trade?
The collar strategy consists of 3 legs:
- Buy stock (long position)
- Sell an out-of-the-money (OTM) call option (short call- ceiling)
- Buy an out-of-the-money protective put (long put- floor)
- Since a protective put debit is added to our covered call trades, the initial time-value returns will be lower than traditional covered call writing
- We are purchasing an insurance policy (the protective put) which will protect us from catastrophic share price decline
Real-life example with Alphabet, Inc. (Nasdaq: GOOGL): 6/24/2024 – 7/19/2024Buy GOOGL at $179.30
- STO the 7/19/2024 $180.00 OTM call at $4.00 (ceiling)
- BTO the 7/19/2024 $175.00 OTM put at $1.99 (floor)
- Net option credit = $2.01
GOOGL call & put option-chain on 6/24/2024
GOOGL collar initial calculations using the BCI Trade Management Calculator (TMC)
- The net option credit is $2.01 per-share (green arrow)
- The breakeven price point is $177.29 (yellow cell)
- The 26-day initial time-value return is 1.12%, 15.74% annualized (brown cells)
- The upside potential is a modest 0.39% (purple cell)
Discussion
The collar strategy is a defensive, conservative approach to covered call writing by adding a protective put. The tradeoff is lower potential returns. We accomplish these calculations by entering a net option credit into the premium column of the Trade Management Calculator (TMC). This software program also allows for an explanatory note in the Covered call Trade Journal, which is an inherent aspect of our TMC spreadsheet.
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Our objective was to create the most complete and comprehensive video program on covered call writing found anywhere. The 4-set video curriculum takes us through the 3-required skills: stock selection, option selection, and position management. The 4th section highlights special circumstances like writing calls against long-term buy-and-hold portfolios.
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Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to publish several of these testimonials in our blog articles. We will never use a last name unless given permission:
Upcoming events
1. BCI-only Webinar
1/16/2025
8 PM ET – 9:30 PM ET
The Collar Strategy: Covered Call Writing with Protective Puts
Protecting covered call trades from catastrophic share loss
This is the strategy Bernie Madoff pretended to use. He called it the split strike conversion strategy, but it was simply a collar. The covered call sets a ceiling on the trade and the protective put guarantees a floor on the trade.
Topics discussed
- What is the collar strategy?
- Uses for the collar
- Entering a collar trade
- Option basics for calls
- Option basics for puts
- Real-life example with NVDA
- What is an option-chain?
- Real-life example using the BCI Trade Management Calculator (TMC)
- Strategy pros & cons
- Educational products & discount coupon
- Q&A
Registration link & details to follow.
2. Long Island Stock Investor Group Part I
Zoom
February 13, 2025
7:30 – 9:00 ET
Private investment club
Covered Call Writing Dividend Stocks
3. Las Vegas Money Show
February 17 – 19, 2025
- Ultra Low-Risk Approaches to Covered Call Writing and Selling Cash-Secured Puts
- Covered Call Writing Technology Stocks
4. Long Island Stock Investor Group Part II
March 13, 2025
7:30 – 9:00 ET
Private investment club
Cash-Secured Puts: 2 Outcomes
5. MoneyShow Masters Symposium Miami 2025
Thursday May 15, 2025
Details to follow.
Alan,
Can I use the TMC spreadsheet if I add a protective put to the covered call trade (collar)?
If so, how?
Thanks, Alan
Howard
Howard,
Yes, definitely.
Here’s how to proceed if we generated a call premium of $3.00 and paid $1.00 for the put:
1. First enter the covered call trade traditionally with the $3.00 premium and note the 20%/10% guidelines (BTC/GTC limit orders). These are the thresholds we use when entering our limit orders after placing the collar trade.
2. Now, change the premium credit from $3.00 to $2.00 (deducting the $1.00 put premium debit).
3. After this adjustment, the initial returns are calculated.
4. The short call (as always) is the active management leg of the trade.
Alan
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 12/06/24.
Be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium Member’s pricing is locked into your current rate and you will never see a rate increase as long as the membership remains active.
Barry and The Blue Collar Investor Team
Alan,
When setting up a collar strategy, which premium should we base our 20%-10% guidelines to? Call premium or net option credit? And why?
Thank you.
Brian
Brian,
Excellent question!
We base our 20%/10% guidelines on the total call premium only and do not deduct the put debit.
If we sold the call for $3.00 and paid $1.00 for the put, our 20%/10% BTC-GTC limit orders are set at $0.60 and $0.30.
The reason is that we will get an earlier call-to-action as share price declines.
Alan
I’m seeking advice on improving my results with the BCI system. Despite following the Weekly Stock Screen and Watch List, I’m experiencing more losses than wins. My typical pattern is:
1. Buy a stock from the list
2. Sell a call option
3. Set a 20% BTC order
4. BTC order triggers as stock drops 7%+
5. Sell the stock at a loss
I’d greatly appreciate any insights or tips from experienced BCI users on:
– Improving stock selection
– Refining exit strategies
– Managing risk more effectively
Has anyone else faced similar challenges? How did you overcome them?
I’m committed to learning and improving, but I need guidance to turn this around. Thank you in advance for any advice you can offer.
William
Hi William,
I’ve been using the BCI system for 2+ years now with outstanding success. I’ve beaten the market in the last 2 years by 10%- 15%.
As I remember it, it was a bit rough-going at the beginning and improved as I became more familiar with the system and avoided some of my early mistakes.
I would say make sure you avoid earnings reports, make sure you are adequately diversified and allocate a similar amount of cash per position. These are some of the errors I made early on. I would also recommend starting with low implied volatility stocks until you get more seasoned.
Stay the course and good luck.
Marie
Alan,
I have always liked IBD. I never knew, but wondered, if it was helpful “playing with options.”
I noticed that you sometimes use the phrase on your website, “IBD 50.”
What are your thoughts, if any, of the usefulness of the different charts in IBD with regards to options, in general.
Many thanks,
Michael
Michael,
In our BCI methodology, we use several IBD screens as a starting point in our screening analysis. We also have our own database of > 3000 securities that we have identified over the past 3 decades as potential option candidates.
We use these stocks to then screen from fundamental, technical and common-sense (minimum trading volume etc.) perspectives. The results are the watchlists of elite-performers we provide to our premium members.
The IBD price charts are excellent for stock selection but need to be adjusted such that they are specific for short-term option trading. As one example, BCI uses exponential, not simple, moving averages, so that the trend line will move faster and align better with our weekly or monthly option trades.
Alan
Alan’s recent interview with Quasar market Live:
https://youtu.be/zOAeD03T6Gs
Premium members:
This week’s 4-page report of top-performing ETFs, along with our sample trade of the week, has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
We have also included a sample trade taken from one of our BCI watchlists.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
NOT A PREMIUM MEMBER? Check out this link:
https://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team