The Collar Strategy is a covered call writing-like strategy where a protective put is added to the trade, thereby establishing a floor and a ceiling with a maximum gain and a maximum loss. This article will demonstrate how we can use our BCI Trade Management Calculator (TMC) to enter, generate initial returns, manage our trades and receive final results from 3 perspectives. We will accomplish this by deducting the put debit from the call credit resulting in a net option credit to make the strategy profitable.
3 legs of a collar trade
- Long stock (buy the shares first)
- Short (covered) out-of-the-money call (ceiling)
- Long out-of-the-money protective put (floor)
Real-life example with Salesforce, Inc. (NYSE: CRM) collar trade on 4/19/2023
- 4/19/2023: Buy 100 x CRM at $197.60
- 4/19/2023: STO 1 x 5/19/2023 $200.00 call at $5.15
- 4/19/2023: BTO 1 5/19/2023 $190.00 put at $2.99
CRM option-chain on 4/19/2023
CRM Option-Chain for the 5-19-2023 Expirations
CRM calculations for covered call trade only
CRM: Covered Call Aspect Only
- Brown cells: 2.61% 31-day initial which annualizes to 30.69%
- Yellow cell: The breakeven price point ($192.45)
- Pink cell: Upside potential if sharer price accelerates to the OTM call strike (1.21%)
CRM collar calculations deducting the put debit from the call credit ($5.15 – $2.99)
CRM: Initial Collar Calculations
- Brown cells: 1.09% 31-day initial which annualizes to 12.87%
- Yellow cell: The breakeven price point ($195.44)
- Pink cell: Upside potential if sharer price accelerates to the OTM call strike (1.21%)
3 major outcomes at expiration
The TMC will calculate the following 3 scenarios:
- Brown cells: Stock price > $200.00 (above OTM call strike)
- Yellow cells: Stock price = $197.60 (no change)
- Pink cells: Stock price < $190.00 (below OTM put strike)
CRM Calculations After Contract Expiration
CRM_3-Perspective calculations
The spreadsheet shows a maximum 31-day return of 2.31%, a maximum loss of 2.75% and a gain of 1.09% if share price remains the same.
Discussion
Our collar trades can be managed by the BCI Trade Management Calculator (TMC) by deducting the put premium debit from the call premium credit. We can establish both initial and final calculations using this spreadsheet.
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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 share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Alan,
I just purchased your Covered Call Writing Alternative Strategies book. It is packed with answers to so many questions on where to start, how to manage, etc on Poor Man’s Covered Call trades. I have a lot to learn before I start. but I feel I’m on the right track.
Thanks for all you do…
John
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Hello Alan,
I’m a recent Premium member and wanted to say I really enjoy your video instruction and the level of detail you give in your explanations. This has been very helpful to me.
I’m very close to closing my business and retiring to manage & live off of my investments.
I have a question about the CEO strategy:
I know this is a ballpark estimate but it seems reasonable that one could earn approx $120,000 per year on a 500,000 allocation to the CEO type strategy.
I’m somewhat concerned about having a large amount of capital in this strategy if a black swan event were to occur.
My questions are: Do you purchase protection for your covered call strategy in case of a bad event?
If so, at what percentage below the underlying?
If not, What would you do if you were in covered call positions (a large amount of money) and the market ,stock or ETF dropped a large percentage?
I’m trying to understand the best way to protect my capital while using this strategy.
Thanks for your help.
Best,
Mike
Mike,
You are seeking a return of 2% per month. In normal (market up 8% – 10% per-year) and bull markets, this is a reasonable expectation. However, in bear and volatile markets, a 2%/month return is unlikely. More on this later in my response.
A few points to explore:
1. I am a big believer in diversification, not only for the stocks in our option portfolios, but also for investment classes. The bulk of my investments is in options, for sure, but I also have cash in bonds, CDs, money markets and real estate.
2. Protection: In bear and volatile markets, we can use in-the-money calls, we can sell out-of-the-money puts to enter our covered call trades (PCP or “wheel” strategy) or we can purchase protective puts, converting our covered call trades to collar trades.
3. Protective puts: Using this form of protection will cut our returns in half (approximately). It will protect against catastrophic (Black Swan) events, but we have to pay for this “insurance”.
4. Strike of protective put: First determine a realistic monthly (or weekly) initial time-value return goal, let’s say 1%/month. Next, select an OTM call and OTM put that will results in a net option credit of 1%. Let’s set up a hypothetical example:
Buy BCI at $48.00/share.
STO (monthly) $50.00 call at $1.50.
BTO (monthly) $45.00 put at $1.02.
Net option credit = $0.48.
Initial time-value return = 1%.
Our Trade Management Calculator (TMC) will be immensely helpful when establishing these trades. Enter the option premium and the net credit (call premium – put premium).
Bottom line: An expectation of a return of 2%/month is reasonable in normal and bull market environments. In challenging markets, returns will be lower, or we may breakeven or lose money (lose money but beat the market).
I hope these points provide useful guidance.
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 09/15/23.
Also, 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:
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Best,
Barry and The Blue Collar Investor Team
Hey Alan,
What do you think of the new yieldmax etfs such as TSLY that yield over 50%? They use synthetic covered calls.
Thanks,
Gilbert
Gilbert,
Any new security should be given adequate time to prove itself in the long run and YieldMax ETFs, like TSLY, are relatively new.
That said, there are several items that do concern me:
1. I have never seen a covered call writing ETF that out-performs the market (may exist, but I haven’t seen one). They simply can’t implement all the strategy parameters that we can.
2. One of the main advantages of ETFs is they represent baskets of stocks. With YieldMax ETFs, only 1 stock is represented, impairing our diversification requirements.
3. Synthetic covered call writing implies a “Poor Man’s Covered Call Writing” type strategy (long call diagonal debit spread), but I haven’t been able to find specific information on how management enters and manages the trades. I would want to evaluate this information before jumping in.
4. Finally, although the data is limited, a comparison price chart of TSLY with the S&P 500 since its inception, shows that TSLY has under-performed by 38%. See the screenshot below.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Hi Gilbert,
Just to expand on Alan’s points…a “synthetic covered call” is an advanced options trade. The synthetic covered call is a 3-legged trade consisting of:
[1] A Long Call
[2] A Short Put
[3] A Short Call
The long call and short put are at the same strike and same expiration date. These two options have the same risk profile as long stock. To these two instruments, a short call is added to make this a synthetic covered call. While the cost of the trade is lower than a standard covered call, this type of trade requires an extremely advanced knowledge of options trading. Since the synthetic long stock is made up of two options, the complexity is increased. Added to this are the “Greeks” that can do strange things to trades.
Hopefully, they are adding an OTM long protective put to turn the trade into a synthetic collar. To trade these underlying, you need to fully understand how they are created and behave.
Best,
Barry
Premium members:
This week’s 4-page report of top-performing ETFs 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.
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Alan and the BCI team