Protective Puts and the Collar Strategy: Selecting the Best Strike Prices/ Last Chance for Holiday Orders

Covered call writing, when combined with protective puts, is known as the collar strategy. The maximum gain is established by the short call strike while the maximum loss is defined by the long put strike. For example, if a stock is purchased for $48.00 per share and the $50.00 call is sold while the $45.00 put is purchased, we will realize our maximum gain when share price reaches $50.00 or higher and maximum loss when share price declines to $45.00 or lower. This article will highlight how to select the best strike prices for the collar trades using the BCI Collar Calculator.

Establishing our return goals

The collar trade is covered call writing with the additional insurance policy to the downside in the form of the protective put. The call and put premium must result in an option credit so that our goal generating cash flow can be realized. The put premium will result in lower returns than traditional covered call writing but will provide greater protection to the downside. This means we must set our initial return goals lower than conventional covered call writing. For me, I require an initial 1-month initial time value return of 2% – 4% in my accounts. When using protective puts, that percentage goal is reduced to 1% – 2%. We are trading higher potential returns for lower capital risk.

Real-life example with PayPal Holdings, Inc. (NASDAQ: PYPL)

• 6/19/2018: PYPL trading at $84.24
• 6/19/2018: PYPL $85.00 call generates a “bid” price of 2.94
• 6/19/2018: PYPL $83.00 put cost has an “ask” price of $1.98 

PYPL call option chain for 7/20/2018 expirations

PYPL Call Option Chain

PYPL put option chain for 7/20/2018 expirations

PYPL Put Option Chain

Collar calculations using the BCI Collar Calculator

Collar Calculations for PYPL

Note the following:

• The yellow-highlighted cells show the call and put premiums
• The brown cells reflect potential returns
• 1.14% if share price remains the same (meets our 1% – 2% initial 1-month time value return goal)
• 2.04% if share price moves up to the $85.00 call strike or higher
• -0.33% if share price declines to the $83.00 put strike or lower

***Other strikes can be inserted into the blue cells at the top of the spreadsheet if stated goals are not met.

Discussion

When selecting call and put strikes for collar trades, an initial time value return goal is required. Strike prices and their associated premiums can be adjusted if stated goals are not confirmed by the BCI Collar Calculator.

THE BCI COLLAR CALCULATOR CAN BE PURCHASED INDIVIDUALLY OR AS PART OF A 3-CALCULATOR PACKAGE AT THIS LINK;

BCI CALCULATOS

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HOLIDAY DISCOUNT CODE/ Last chance for holiday orders

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Upcoming event

February 7th – 10th, 2019

Orlando Money Show

Omni Orlando Resort @ Champions Gate

February 7th – 10th 2019

Speaking schedule:

1. Getting Started with Stock Options: Creating Monthly Cash Flow with Covered Call Writing 
February 8, 2019, 3:10 pm – 3:40 pm

2. Getting Started with Stock Options: How to Select the Best Options in Bull and Bear markets
February 9, 2019, 2:00 pm – 2:45 pm 

Market tone

This week’s economic news of importance:

• Job openings Oct. 7.1 million (7.0 million last)
• NFIB small business index Nov. 104.8 (107.4 last)
• Producer price index Nov. 0.1% (-0.1% expected)
• Consumer price index Nov. 0.0% (as expected)
• Weekly jobless claims 12/8 206,000 (226,000 expected)
• Federal budget Nov. -205 billion (-139 billion last)
• Retail sales Nov. 0.2% (0.1% expected)
• Industrial production Nov. 0.6% (0.4% expected)
• Markit manufacturing PMI Dec. 53.9 (55.3 last)
• Markit services PMI Dec. 53.4 (54.7 last)
• Business inventories Oct. 0.6% (0.3% last)

THE WEEK AHEAD

Mon Dec. 17th

• Home builders index Dec.

Tue Dec. 18th

• Housing starts Nov.
• Building permits Nov.

Wed Dec. 19th

• Existing home sales Nov.
• FOMC statement

Thu December 20th

• Weekly jobless claims 12/15
• Philly Fed Dec.
• Leading economic indicators Nov.

Fri December 21st

• GDP revision Q3
• Durable goods orders Nov.
• Personal income Nov.
• Consumer spending Nov.
• Core inflation Nov.
• Consumer sentiment index Dec.

For the week, the S&P 500 moved down 1.26%% for a year-to-date return of -2.76%

Summary

IBD: Market uptrend under pressure

GMI: 0/6- Bearish signal since market close of November 13th, 2018 as of Friday morning

BCI: Selling an equal number of out-of-the-money and in-the-money strikes. Will hold with this ratio until the Fed announcement this coming Wednesday.

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The 6-month charts point to a bearish tone. In the past six months, the S&P 500 down 6% while the VIX (21.63) moved up by 81%.

Wishing you much success,

Alan and the BCI team