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Collar Strategy Using Weekly Calls and Monthly Puts: A Real-Life Example with LABU

The collar strategy is a covered call writing-like strategy where protective puts are added to our covered call trades. This creates a ceiling (the short call) and a floor (the long put). Typically, the expiration dates of the calls and puts are the same. We must also ensure that the call credit and put debit result in a net credit scenario. On 8/26/2021, Saafi wrote to me with a proposed collar trade where a Weekly and a Monthly put option were used. This article will analyze this real-life trade with Direxion Daily S&P Biotech Bull 3X Shares (NYSE: LABU). This is a leveraged ETF.

 

Saafi’s proposed collar trade

  • 8/27/2021: Buy 100 x LABU at $60.50
  • 8/27/2021: STO 1 x 9/3/2021 $63.60 call at $1.85 (ceiling)
  • 8/27/2021: BTO 1 x 9/17/2021 $59.00 put at $4.85 (floor)
  • The trade incorporates a 1-week call and a 3-week put

 

Conversion to a 1-week trade

We all (okay most) remember high school algebra where we convert fractions to a common denominator. In this case, let’s simplify the trade analysis by breaking up the 3-week put premium into 3 weekly premiums of $1.62 ($4.85/3).

 

Calculations using the BCI Collar Calculator

 

LABU: Collar Calculations

 

  • The red arrows show an initial 1-week time-value return of 0f 0.38%, 19.82% annualized
  • The green arrows show a maximum 1-week return (with upside potential) of 5.34%, 278.38% annualized
  • The blue arrows show a maximum 1-week loss (to the put strike) of 2.10%, 109.46% annualized

 

Discussion

To appropriately analyze a collar trade with a longer-term protective put, we must convert the put premium to a similar time frame as the short call. These stats are then entered into the BCI Collar Calculator to ensure the return meet our initial time-value return goal range which will differ from investor-to-investor.

Saafi’s trade incorporated a leveraged ETF which creates a good-news-bad-news high and high premium trade. Using a will mitigate potential losses to the downside. Generally speaking, are not appropriate for most retail investors.

 

For more information on the collar strategy

 

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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 name unless given permission:

 

Hi Alan,

I am enjoying your new BCI Investor Package. I’m so glad I bought it.

I am about halfway through the set and I’m already learning or re-learning things that I had forgotten or got lazy and took shortcuts. I know this was a massive undertaking for you and your team and I thank you for it.

I also want you to know you’ re-inspired me to refocus my efforts to become a great Covered Call writer. Over the years I have explored other strategies and vendors, but always knew that for the average trader nothing beats it. I have read many articles about Covered calls from other authors, but none compared to your preciseness, consistency and passion.

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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

19 Responses to “Collar Strategy Using Weekly Calls and Monthly Puts: A Real-Life Example with LABU”

  1. JP January 1, 2022 3:58 am #

    Alan,

    Happy New Year Alan. With some of the large amounts of volatility we have seen on monthly options closing dates, do you think it is still better to do monthly c calls and puts or do weekly dates start to make more sense?

    Best,
    JP

    • Alan Ellman January 1, 2022 7:23 am #

      JP,

      We can realize outstanding success with both Weeklys and Monthlys. I do not believe the current market conditions should be the sole determining factor as to which we utilize.

      I use both in my portfolios. Some are dedicated to Weeklys (10-Delta Weeklys puts, as one example) and some to Monthlys (traditional covered call writing as one example).

      There are pros and cons to both.

      Here are a few:

      Weeklys offer the opportunity for greater annualized returns and facilitate the ability to circumvent earnings reports and ex-dividend dates.

      Monthlys represent more opportunities to mitigate trades that turn against us or enhance trade results to higher levels and require fewer rolling decisions.

      Our selections are based on the strategies selected and trading style.

      The VIX (CBOE Volatility Index) is currently at 17.22, not egregiously high.

      Alan

  2. Byung January 1, 2022 7:55 pm #

    Hi Alan,

    Happy new year.

    I finished studying your covered call method, and have been generating 1% to 3% return each month. Thank you very much for your content and guidance.

    I recently began studying your cash secured put method, and have 2 questions.

    If I sold a cash secured put… and if the stock price declines… does the cost to “buy to close” decline as well?

    Vice versa. If I sold a cash secured put… and if the stock price rises… does the cost to “buy to close” rise as well?

    Please write back at your earliest convenience.

    Thank you.
    Byung

    • Alan Ellman January 2, 2022 8:04 am #

      Byung,

      There is an inverse relationship between stock price and put value.

      To your questions:

      1. If stock price declines, put value increases so the cost-to-close will be more expensive.

      2. If stock price rises, put value declines and the cost-to-close the sold put will be cheaper. This is the basis of our 20%/10% guidelines for selling cash-secured puts.

      Put Deltas are stated with a (-) sign, reflecting the inverse relationship between stock price and put value.

      Here’s an example: The buyer of a $50.00 put has the right to sell their shares at $50.00. If share price moves higher, that right is worth less. If share price declines, that right is worth more.

      Alan

  3. Barry B January 1, 2022 9:44 pm #

    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 12/31/21.

    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:

    http://www.youtube.com/user/BlueCollarInvestor

    On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.

    Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  4. Jim January 3, 2022 6:37 am #

    Alan,

    Do you normally buy a stock and sell the CC in 2 steps or Buy/Sell in one step and which do you find results in a better Call price if any?

    Thanks,

    Jim

  5. Ted January 3, 2022 4:08 pm #

    Happy New Year Alan.

    What are your thoughts on entering a cash secured put at the same time we write a covered call for a stock. Isn’t this an effective way of capturing extra premiums?

    – Ted

    • Alan Ellman January 4, 2022 7:18 am #

      Ted,

      Both strategies require a cash investment which must be available to us. In the case of covered call writing, we must first purchase the shares in 100 share increments. In the case of selling cash-secured puts, we must set aside the cash for a potential future transaction as we are obligated to buy the shares at the strike price, if exercised. In other words, we must be okay doubling our position of that specific underlying security.

      Mastering both strategies is especially useful when employing the PCP (put-call-put) strategy:

      https://www.thebluecollarinvestor.com/using-put-selling-to-enter-a-covered-call-trade-at-a-discount/

      I have different portfolios set up for both strategies but favor covered call writing in normal to bull markets because it allows for 2 income streams when using out-of-the-money strikes: option premium + share appreciation from current market value up to the out-of-the-money strike.

      Alan

      • Ted January 4, 2022 8:12 am #

        Thanks Alan. I appreciate it. I realized after the fact that it would tie up more money – throwing off the 20% of total portfolio rule. Thanks again.

        – Ted

  6. Nick January 3, 2022 4:09 pm #

    Hi Alan,

    I am trying to understand your report and trying to play some stocks from it.
    Today, I played AMD, MU, ON.

    AMD covered Stock @ 150, sold CALL Jan 21 150 strike @ $6.54.
    Not being very confident on the trade I got protection on downside:
    bought PUT Jan 07 144 strike @ 1.07
    Very bullish on AMD.
    I do not have the Elite calculator (yet) but maybe you can analyze and comment on this trade.
    All 3 trades were done on the same idea

    Thank you,
    ~Nick
    Premium member

    • Alan Ellman January 4, 2022 7:40 am #

      Nick,

      When we add a protective put to a covered call trade, it becomes a “collar trade” We typically use the same expiration dates for the out-of-the-money calls and puts.

      To evaluate this AMD trade, let’s estimate and triple the cost of the protective put (as an example) to $3.21 and assume a similar 1/21/2022 expiration as the call position.

      The screenshot below shows the BCI Collar Calculator at work. The red arrows show 1-month and annualized initial and maximum returns (an at-the-money call strike was used) of 2.22% and 32.41% if AMD remains at or above $150.00.

      The blue arrows show 1-month and annualized returns of -1.78% and -25.99% should AMD drop below the $144.00 put strike.

      The calculator will assist us in evaluating the risk-reward stats for the trade and allows us to confirm if the returns align with our goals.

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      Alan

  7. Tom January 3, 2022 7:12 pm #

    Hi Alan,

    quick question

    Why would a stock with an option chain not have a bid price 47 days out.

    Tom

  8. Alan Ellman January 5, 2022 4:56 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.

    The mid-week market tone is located on page 1 of the report.

    New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.

    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

  9. Tom January 6, 2022 1:33 am #

    Hi Alan,

    In your article regarding leaps, you say that our plan however is to continually roll the option to later expirations. My question is at what point do you roll the option? what is my guideline.

    Tom

    • Alan Ellman January 6, 2022 7:12 am #

      Tom,

      Here are the PMCC rolling guidelines:

      Short call: On or near expiration Friday… the same as traditional covered call writing.

      Long LEAPS: 90 days prior to contract expiration.

      Alan

      • Tom January 6, 2022 6:51 pm #

        Hi Alan,

        When you buy a Leap position, are you selling to open or buying to open? I think I am confused on that point

        Tom

        • Alan Ellman January 7, 2022 9:11 am #

          Tom,

          Use the buy-to-open choice.

          We sell-to-open the short calls after buying the LEAPS for the PMCC strategy.

          Alan

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