The collar strategy is a covered call writing-like strategy where a protective put is added to the covered call trade, creating a 3-leg trade. BCI has developed 2 calculators that can be utilized with the collar strategy. This article will demonstrate how to use the BCI Collar Calculator and the BCI Trade Management Calculator.
Components of the collar trade
- Buy stock (100 share increments)
- Sell OTM call options (strike higher than current market value)
- Buy OTM put options (strike lower than current market value)
The call strike represents a ceiling on the trade (best case scenario); the put strike is the floor of the trade (worst case scenario).
Hypothetical example of the collar trade
- Buy 100 shares of BCI (long stock position) at $48.00
- Sell the $50.00 OTM call (short call position creating a ceiling on the trade) for $2.00
- Buy the $45.00 OTM put (long put position creating a floor on the trade) for $1.00
- Net option credit is $1.00
Real-life example with CROX ($123.59): 3/1/2023 – 3/31/2023 contract
Call option-chain
CROX: Call Option-Chain on 3-1-2023
Put option-chain
CROX: Put Option-Chain on 3/1/2023
BCI Collar Calculator: initial returns
BCI Collar Calculator
Note the following:
- The initial return is 1.13%
- The maximum return with upside potential is 2.27%
- The maximum loss with the protective put in place is 2.58%
BCI Trade Management Calculator (TMC): initial returns
TMC Calculations with the TMC Calculator
Note the following:
- The option premium entered is $1.40 ($6.40 – $5.00)
- The initial return is 1.13% (same as Collar Calculator)
- The max return with upside potential is 2.27% (1.13% + 1.14%)
Advantage of the TMC spreadsheet
The TMC goes much further than the BCI Collar Calculator after these initial calculations. It allows us to manage the active leg of the collar trade, the short call and then calculate post-adjusted final trade and portfolio results.
Discussion
The collar strategy is a covered call writing-like trade which includes a ceiling and floor. BCI has developed 2 spreadsheets for this strategy, 1 specific for the collar (BCI Collar Calculator) and 1 that can be used for most forms of covered call writing and selling cash-secured puts (TMC).
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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,
The last few weeks report is, well just downright profitable. Your market sentiment blurb and all the little nuances of the BLUE COLLAR REPORT save me hours.
CEO strategy ETF’s ratings were perfect, made premiums + some stock appreciation, and let some get assigned so I can start all over this week.
Thanks.
Sing it from rooftops in Poconos … Became a premium member.
Big profits so far April, since your report I have increased my already great covered call income by 25% at least.
PS
SGOL made a great return and just missed getting assigned and I can sell outright for small profit or write some calls …….
Alan, I love what you do for us. I’m a broken record, but thanks, thanks thanks……..
John
Upcoming events
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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 07/28/23.
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:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.
Important Note: The Weekly Stock Report for next week will be uploaded on Friday morning, August 4, 2023, using the closing prices from Thursday, August 3, 2023.
Best,
Barry and The Blue Collar Investor Team
Alan,
I am a new premium member and loving all the information you and Barry and your team provide.
I have a question about the stock report that was published last night. I know the stocks in the white cells are eligible for covered call writing but I see a few are listed as not having adequate option open interest. PRIM is one example.
So, my question is why are these stocks listed in the report?
Thanks for your guidance.
Henry
Henry,
In our weekly stock reports, when there is an “N” in the column for near-the-money (NTM) strikes, it signifies that the option liquidity does not meet the BCI Guidelines of:
“At least 100 contracts of open interest (OI) and/or a bid-ask spread of $0.30 or less”.
There are 2 main reasons why we leave these securities in our reports:
1. OI liquidity can change during a contract. This is why we ask our members to re-check option-chains prior to trade executions.
2. Some of our members also use these reports to buy and sell stocks without the option component, resulting in multi-purpose reports.
Alan
Alan,
your article comes just a few days late for me. I wish that it came out last week.
My mistake was to forget the importance of hedging.
I should have hedged my CROX position with a protective put when I decided to take it through earnings, and the result was an immediate 20% paper loss.
CROX posted a very favorable earnings report, but the market decided against it.
My breakeven today is 117.79. CROX recovered a bit by Friday and ended at 108.14, but………:-(
Conclusion: THE MARKET IS UNPREDICTABLE
Roni
And also UNFORGIVABLE
Roni,
Your conclusions are spot on. Earnings reports are so much more than good or bad. Did they meet market expectations (consensus)? What about guidance?
When we hold a stock through an earnings report, it could lead us to the champagne or to the Kleenex. Sorry CROX went the Kleenex route, despite being a wonderful performer prior to the report.
Alan
Hello Alan,
I’m hoping you can help with this quick question.
If I want to execute a BTC on a contract that I opened on 7/24/23, where do I find the cost of the BTC option? Do I use the Ask price on the options chain with the date that matches the option that I opened (in this case 8/18/23), or do I use the closest options chain date, (which is 8/4/23)?
It’s my first month of trading, so I realize my question seems stupid to an experienced trader, and I promise to keep my questions to a minimum.
Thanks in advance for your guidance.
Regards,
Mike
Mike,
In our BCI community, there is no such thing as a “stupid question”. We all asked these same questions when we first started.
To BTC an open order, go to the exact same option-chain used to open the order … same stock, same strike, same expiration date. Have a look at the new bid-ask spread and focus in on the “ask” price. If the spread is > $0.10, set a limit order slightly higher than spread.
As an example, if the spread (bid-ask) is $0.50 – $0.90, the midpoint is $0.70. Set a limit order to BTC at $0.75. There’s a reasonable chance that this order will be executed.
Alan
Hi Alan,
Thank you for sharing your expertise on covered call selling and exit strategies. In the past I sold calls and practiced your exit strategies. Currently, I am rereading your books and just ordered “the complete encyclopedia on covered call writing”.
Now I own about 800 shares of Amazon and considering selling calls. What is your opinion on selling calls against this stock?
Thank you in advance for any advice. I look forward to your response.
Mary Ellen
Thank you, Alan,
to avoid the Kleenex route I should have bought a protective put as you state in the article above.
Also, I remember that Barry recommended it to me some time ago, but I forgot about it, and now I am disappointed with myself.
Roni
Mary Ellen,
Leveraging shares of the stocks we own to generate cash-flow is appropriate for most securities as long as the income from premium meets our pre-stated goals. Let’s say our goal is 1% – 3% per-month. We check the option-chain and if AMZN premiums offer that result, we are good to go. This should not be an issue with AMZN.
Now, how we structure the trade is critical. Let’s say we want to avoid exercise of our shares. Here, we would use deep out-of-the-money strikes with low probability of the option expiring in-the-money (below current market value). We must also be prepared to buy back the option if share price accelerates exponentially. In this scenario, we must also meet our pre-stated initial time-value return goal range which will be lower than if exercise is not an issue.
In all cases, we must be prepared to take advantage of our exit strategy opportunities.
*** Be sure to wait until after the August 3rd earnings report release should you decide to initiate a covered call trade.
Alan
Hi Alan and Barry:
I recently finished reading your Covered Call Writing Alternative Strategies. I especially liked the Poor Man’s Covered Call strategy.
I’ve found several charts that look good but haven’t been able to find any trades that meet your criteria – “Difference between the 2 strikes + the premium from the initial call sale must be greater than the cost of the LEAPS premium paid”.
Could you give me an example of a real trade that is valid today so I can check my math to understand what I’m doing wrong.
Thanks,
George
George,
The main reason our PMCC Calculator will display a “NO” as it relates to a trade aligning with the BCI trade initialization formula, is that the long LEAPS strike is not deep enough in-the-money.
Since we want the time-value of the short call to be greater than that of the long LEAPS, we must use a deep in-the-money LEAPS strike.
I created a successful example using pre-market data on Wednesday (today, as I type). See image below. Note that, with QQQ trading at $379.77, I used the $230.00 deep in-the-money LEAPS strike to result in a “YES” trade or one that meets our required formula. Similar results can be produced using less expensive securities.
To achieve this protection, it will cost more for the LEAPS but, if forced to close the trade if share price accelerates exponentially, we will close at a profit.
If you have our spreadsheet, try it out with higher strikes, like $250.00, and you will see a “NO” result.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Hi Alan:
Thanks for the quick reply and excellent example. I understand what I was doing wrong. I was starting with a delta .75 LEAPS and adjusting the strikes and expiration dates trying to get a “YES”. I should have been going much deeper in the money.
I have 2 more questions and then I promise to stop bothering you.
I’m thinking of starting a BCI membership and was wondering if you provide any screens that would be helpful in identifying good candidates for PMCC trades?
I understand that you will close the entire PMCC position if your initial assumptions have changed for the worse. Will you also close it based on a $$ or % stop loss?
Your books and weekly emails over the years have really helped my trading so thank you for that too.
George
George,
Thank you for your kind words and you certainly are not bothering me. I love what I do and want success for all our members.
Our weekly stock and ETF reports along with our monthly Blue Chip (Dow 30) Report will all produce strong candidates for the PMCC strategy as well as our other option strategies. The difference related to PMCC (and one of the disadvantages of PMCC) is that PMCC implies a long-term commitment.
When studying our watch lists, we would lean to recognizable companies, cash rich, with histories of growth and solid price performance. I gave several such examples in my book, “Covered Call Writing Alternative Strategies”. Although there is no specific screen for PMCC, you will find multiple candidates among these lists.
Here is a link to review membership benefits:
https://youtu.be/EXMO-KwZuJs
Regarding closing both legs of a PMCC trade when share price declines: The active leg of the trade is the short call. We use our exit strategy arsenal to mitigate losses and enhance gains. Use the tabs at the bottom of the BCI PMCC Calculator to guide our position management trades.
If our long-term bullish assessment of the underlying security changes, we can close both legs of the trade at any time. This would be the main guideline for PMCC. For traditional covered call writing, we may implement our 7% guideline to close both legs of the trade, but here we are taking on a longer-term commitment.
The BCI trade initialization formula will protect us from closing at a loss when share price accelerates exponentially, but we still have risk to the downside.
Your questions are spot on since your concerns lie with structuring the trades and then managing them. I suggest re-reading the sections of the book where pros & cons of PMCC are discussed and then make an informed decision if this is the right strategy for you and your family.
Alan
Alan,
You’ve answered all my questions and now I’m ready to start making some money.
Thanks again and have a great day.
George
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.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
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
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 08/03/23.
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:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.
Best,
Barry and The Blue Collar Investor Team