When we add a protective put to our covered call trades the strategy is known as a collar. To reduce the monthly cost of the long put, some investors will consider using longer-term put expirations This article will explore the pros and cons of this approach using Ciena Corp. (NYSE: CIEN).

 

Collar trade information on 4/21/2020

  • 4/21/2020: CIEN trading at $44.04
  • 4/21/2020: 5/15/2020 $45.00 call has a bid price of $1.52
  • 4/21/2020: 5/15/2020 $42.00 protective put has an ask price of 1.17
  • 4/21/2020: 1/15/2021 $42.00 protective put has an ask price of $6.10

 

9-month cost of protective put using current option-chain data

  • 1-month expiration: $1.17 x 9 = $10.53 per-share
  • 9-month expiration: $6.10 or $0.68 per-month
  • Difference = $4.43 or a 42.1% discount using the 9-month expiration put

 

Collar calculations using the 2 monthly put-costs: The BCI Collar Calculator 

 

CIEN Calculations with the BCI Collar Calculator

 

  • Red arrow: The 9-month put expiration results in more than doubling the initial returns
  • Blue arrow: The trade with upside potential shows that the 9-month put results in a higher return by 1.12% per month
  • Purple arrow: The maximum loss is better by 1.12% using the 9-month put expiration

 

Disadvantages of the collar with long-term protective puts

  • Trade success depends on share price remaining in a narrow trading range for 9-months.
  • Our bullish assumption on the underlying security may change
  • Forces us to maneuver through 2 to 3 earnings reports (partially protected by the long put)
  • If share price accelerates significantly, we maximize the covered call trade and lose on the put side. Assignment prior to put expiration may result in a loss.
  • If share price declines below the breakeven, we lose money

 

Discussion

Unless we are avoiding ex-dividend dates (may use 2-month expirations) , my preference is to stay with 1-month obligations. Although the monthly cost of the put will be more, having the flexibility to re-assess our bullish assumptions on a regular basis is more important. Avoiding earnings reports is also more valuable than a few percentage points.

 

Additional collar information

BOOK

Online DVD Program with downloadable workbook

Collar Calculator

 

My interview with Nasdaq reporter

https://www.nasdaq.com/videos/tradetalks%3A-how-to-use-the-nasdaq-100-volatility-index-volq-in-covered-call-writing

 

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 think the resources and strategy you are providing is top-notch. Safe, profitable and easy to follow. The percentage-based calculations and realized profit-taking shortly after the point of entry (5 – 30 days) is what truly separates your program from others.

Thanks, and enjoy the weekend.

Best,

KB

 

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April 10,2021 at 10 AM ET

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Alan speaking at a Money Show event

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