The collar trade is a covered call writing trade with a protective put. The active leg of the trade is the short call. When exit strategy opportunities present, we make the appropriate trade adjustments. These can be incorporated into our BCI Collar Calculator. This article will highlight a hypothetical trade where the short call is closed and then resold thereby hitting a double.
How is the collar trade structured?
- Buy a stock in 100 share increments
- Sell out-of-the-money (OTM) call options (strikes higher than current market value)
- Buy out-of-the-money put options (strikes lower than current market value)
- The net option position should result in an option credit that meets our stated initial time-value return goal range
Hypothetical trade with BCI
- 8/23/2021: Buy BCI at $83.32
- 8/23/2021: Sell the $84.00 (OTM) call at $3.16
- 8/23/2021: Buy the $77.50 (OTM) put at $1.26
- 9/1/2021: Buy-to-close the $84.00 call at $0.63 (20% guideline) as share price declines
- 9/6/2021: Sell-to-open the $84.00 call at $1.50 (hitting a double) as share price recovers
BCI Collar Calculator results (left column to right column)
Collar Calculator Adjustments
Initial trade structuring (left column)
- Initial return is 2.28% with a potential max return of 3.10% if share price moves up to or beyond the $84.00 strike
- Maximum loss is 4.70%
Short call is closed on 9/1/2021: The 20% guideline threshold ($0.63) is reached (middle column)
- The time-value return credit is reduced from 2.28% to 1.52%
- The max gain is decreased from 3.10% to 2.34%
- The max loss is increased from 4.70% to 5.46%
Short call is re-sold (hitting a double) on 9/6/2021 for $1.50 (right column)
- The time-value return credit is increased from 1.52%% to 3.32%
- The max gain is increased from 2.34% to 4.14%
- The max loss is decreased from 5.46% to 3.66%
Discussion
The BCI Collar Calculator can be used to monitor our trade adjustments. Additional adjustments can be accomplished if we sell the protective put although the active leg of the trade is the short call.
For more information on the collar strategy
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Hey Alan,
I have great appreciation for all you do and sharing your wisdom with us! I have enjoyed much success trading options with your methods I read in your calls and put books as well as being a premium member.
Thanks again!
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Alan,
Your article, as always, is perfect. Thank you.
My concern with this type of trade is finding a ticker or several tickers to fit this hypothetical situation when placing ten or more monthly trades.
There are so many different aspects to consider and check before deciding on each trade at the beginning of the options cycle. It becomes more complicated if I should include a protective put to reduce the risk.
Another problem with the collar trade is the additional complication with implementing exit strategies later in the cycle.
There are undoubtedly many brighter minds who can dominate all these features, but my skills are limited, and I must therefore keep it as simple as possible. Actually, the more I learn, the more I find it challenging.
It was more fun when I knew less – Roni.
Roni,
Like all strategies, the collar strategy has its pros and cons. The good news is the protection against catastrophic share price decline. The bad news is that our initial time-value returns are reduced approximately in half.
Each investor must decide if the strategy meets their trading style and goals. Many of our members do use this strategy and so we provide the information and trading tools to assist in achieving maximum returns.
Between the 3 reports we provide to our members, we should find enough candidates to populate our portfolios. As an example, I used ON Semiconductor (ON) taken from the stock report published on the member site last night (see screenshot below):
Red arrow: Initial 1-month time-value return
Blue arrow: Maximum 1-month time-value return
Green arrow: Maximum 1-month loss
You bring out a good point that, with the collar, there are 3 legs rather than the 2 legs in traditional covered call writing. However, the active management leg is the short call while the protective put is in place as an “insurance policy” Eventual sale of the put is certainly possible.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Alan,
I sold the 12/17 30 covered call on BGFV for 7.22 and now the stock is trading at 44.12 and the option is 15.90. What would you do?
Thanks,
JW
JW,
At this point in time, the maximum return based on initial trade structuring is looking good. Of course, there’s a long way to go until 12/17.
It’s too early to consider rolling-out but we can use the “Unwind Now” tab of the Elite and Elite-Plus Calculators to determine the time-value cost-to-close and perhaps activate the “mid-contract unwind” exit strategy.
The screenshot below shows a time-value cost-to-close of $178.00 per-contract or 5.93%. We ask ourselves if we can generate at least 1% more than 5.93% by contract expiration or in about 1 month. It would take another highly volatile stock to do so. Using the MCU strategy at this time may be appropriate for some aggressive investors but most conservative retail investors will take no action and continue to monitor this trade which has a favorable outlook at this point in time.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Hi Alan- you said ‘of course 12/17 is a long way away.’ And just like that the stock price is down (ex-dividend) to 29.60!
This has been a great educational experience (with a positive return to boot.)
JW
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 11/12/21.
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Hi Alan,
Is possible can you give comparison of the hypothetical collar strategy to the bull credit put spread and the bull debit call spread with same strike prices of $84.00 and $77.50?
Many thanks,
yungchi
Thanks, Alan,
Ok, I agree; It is a cool trade and protects you against a crash.
But the initial return doesn’t pay for the hard work involved, although, the potential max. return is great.
Please correct me if I am wrong, but my calculations do not match the calculator’s results exactly. All my percentiles area tad higher??
Roni
Roni,
The difference could be in “rounding” features of your device. For example, in the left column:
[($3.16 – $1.26)/$83.32] = 2.28%
Alan
Alan,
I am referring to the example from your response, where you show a trade for ON Semiconductor (ON).
My total investment, in this case, would be 5788 (5858 – 205 + 135)
Therefore when I calculate the percentages of the initial return 70 = 1,21%, the max. 212 = 3.66, and max. loss 288 = 4.97%.
The difference is tiny, but I wonder why it does not match?
Roni
Roni,
The small difference is due to the number entered into the denominator.
In the BCI methodology, we do not use the net option credit as both initial profit and a factor to lower the cost-basis. We use it only as initial profit when setting up our trades. In the case of ON, the difference lies in the subtraction of $0.70 from the price of the stock.
When a trade is closed, and we have a more complete perspective of our trade start-to-finish, we can deduct all credits from the stock price to get final realized returns.
Alan
Alan,
OK. That makes perfect sense.
Thank you again and again.
Roni
Hi Yungchi,
Unfortunately, we can’t show examples of Bull Put Credit Spread or a Bull Call Debit Spread because the example that Alan used in the article is a hypothetical example and I am unable to get appropriate strikes and premium(s) to address your question.
Best,
Barry
Hi Alan,
When you refer to the typical range of 2 – 4% for ATM strikes, how would that apply to OTM strikes?
Should the combined option premium and upside on the stock be no more than 4 to 6%?
Just trying to have a better understanding of the percentage range.
Best Regards,
Ted
Ted,
The initial time-value return goal range is based on our strategy return goals and personal risk-tolerance. It does not include upside potential or downside protection.
For me, it’s 2% – 4% per-month. I use a more conservative 1% – 2% in my mother’s portfolio. The higher the initial time-value returns, the greater the risk so each investor must make a personal decision regarding this range.
If an OTM call strike is selected, the potential return will be greater than the initial time-value returns.
Bottom line: It’s the initial time-value returns we focus in on when constructing our trades and then use the “moneyness” of the strike decisions based on overall market assessment, chart technicals and personal risk-tolerance.
Alan
Understood. Thanks Alan. Wishing you, your family and the BCI team a very Happy Thanksgiving.
Barry,
When I saw the Stock Screen last Sunday, I noticed that WDAY confirmed their ER for 11/18/21(expected originally for 11/25/21,) and therefore I bought a protective put, which reduced my potential gain from 4.5% to 3.5%. No big deal.
I would have probably missed this important change, so, thank you.
Roni
Roni,
Good move! I’m glad to see that you are getting more comfortable with protective puts and collars. They are great tools.
Best,
Barry
Barry,
Yes. Thank you.
I am learning, but it is hard to teach new tricks to an old dog.
Roni
Roni,
I respectfully disagree…the “old dog” appears to have mastered the new trick. That was a sound move with the protective put on WDAY. Depending on how WDAY’s ER is tonight, you may be able to sell the put and get some of the cost back…and improve your ROO.
Best,
Barry
Barry,
It was touch and go for a while in the after-hours, but now WDAY seems to be recovering. The ER was very positive, and this ticker will possibly be back bold on your future Stock Screens.
Both my CC and CSP strikes are at 280.00 and expire today. The CSP is almost worthless (20.00 as I write), and I will leave it as protection for sudden reversal. My CC will probably be assigned, and my ROO at 950.00 would match the stock price by the end of this options cycle. 🙂
Thanks for your supportive comments and help – Roni
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Way to go, Roni!
Hoyt
Thank you, Hoyt.
Roni
Hi Hoyt,
Haven’t seen you on the blog in a while. Good to “see” you again… I hope all is well.
Best,
Barry
Thanks, Barry.
I have the aches and pains of an old “gunslinger”.:-) But other than that I am doing well. I hope you are too. How are those knees doing?
We have been blessed to live in interesting times. Going from dial up modems with PCFN to the trading platforms of TDA, E*Trade, and now tastyworks is like having Christmas every day.
Options trading can be so intellectually stimulating. However, innovating one may be, the mechanics must be consistent.
Thank you, Alan, and all the BCI Team for all you do to enable individual investors to be the CEOs of Their Own Money.
Good Luck,
Hoyt