Covered call writing is associated with 2 legs: we are long the stock and short the call option. If we add a protective put, we have converted the covered call trade to a collar trade which has both a floor (put strike) and a ceiling (call strike). The traditional collar trades uses out-of-the-money strikes for both option positions. This article will simplify the process for determining which are the most appropriate strike prices to choose.

 

Setting our initial time-value return goal range for collar trades

Since we are incurring a debit when we buy the protective put, we must select a lower range than we would for traditional covered call writing. The higher the returns, the greater the risk so we must find a range that aligns with our personal risk-tolerance. This will vary from investor-to-investor. For me, it’s 2% – 4% and up to 6% in bull markets for 1-month near-the-money call options. For collars, we would adjust that range depending on how much protection we are seeking. A reasonable range for collars for those seeking returns similar to mine would be 1% – 2% per month and up to 3% in bull markets (in strong bull markets, we may opt not to buy protective puts).

 

AMD Option-Chain for Calls and Puts

 

  • The $79.00 call generated $4.00 per-share
  • The $70.00 put costs $1.84 per-share

 

Collar Calculations with the BCI Collar Calculator

 

 

AMD Calculations: The BCI Collar Calculator

Initial time-value results

  • The net 1-month time-value return is 2.79%
  • Maximum 1-month return with upside potential is 4.82%
  • The maximum 1-month loss is 6.81%

 

Discussion

Collar strikes are generally out-of-the-money. We first set the initial time-value return goal range that fits our personal risk-tolerance profile for the call premium and then halve that amount to buy the protective put. The option-chain will guide us to those appropriate strike selections.

 

For more information on the Collar Strategy

 

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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:

Dr. Ellman,

I love your books and videos and how you got into options. I’ve been investing in stocks and BUYING options mostly until I realized how often I lost money on them. It was you that convinced me to be on the other side of the trade. I’ve recommended your books to many.

Write another book PLEASE.

Very respectfully,

Johnny

 

Upcoming events

1. Mad Hedge Webinar Event: Covered Call Writing Multiple Applications

March 11, 2021

11 AM ET

Register here

 

2. Money Show Virtual Event

March 17. 2021

12:10 PM – 12:40 PM

Details to follow

 

3. Market Madness Summit

March 23rd

12 PM ET

Using Both Covered Call Writing and Put-Selling to Generate

 Monthly Cash Flow and Buy Stocks at a Discount

The PCP (put-call-put) Strategy (wheel strategy)

 

4. AAII Research Triangle NC

April 10,2021 at 10 AM ET

Zoom webinar- details to follow

 

5. Wealth365 Summit

April 19th – 24th

Details to follow

 

Alan speaking at a Money Show event

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