Buying calls is a losing proposition? Collars are better?

Discussion in 'Options' started by crgarcia, Oct 26, 2009.

  1. When buying calls you need the stock/ETF to move up so you at least break-even.
    You lose money right when starting the trade.

    On the other hand, collars, allow you to receive dividends and while the max profit is capped, you don't need a move to break even.
    The stock may remain at the same price, yet you profit a little (from dividends)?
     
  2. 1) Well?......which is it?
    2) Confirmation of the obvious......each has its merits. :cool:
     
  3. Tom1am

    Tom1am

    ...and you can sell the collar for a credit
     
  4. If the premise is that a stock is going to go nowhere or drop then obviously, collars (verticals) are better than long calls. But if your premise is that the stock will rise, calls are likely to be better. To claim that one is categorically better than the other is specious. What's better depends on the moves that you can identify and employing the appropriate strategy.

    As for receiving dividends in a collar, that's not going to get you anywhere because a dividend is payment to you with your own money. You need the underlying to appreciate by that amount for the dividend to be a profit.
     
  5. Bear put spread = collar since options are adjusted for interest and dividends expected during the life of the option in question.

    If you want pure volatility, you can delta hedge your long call...
     
  6. Hester

    Hester

    Not necessarily. Thats only if you hold to expiration. If you buy a call and close it out the next day, you only lose whatever the theta is. If volatility spikes then you may make money even if the stock goes nowhere or even slightly down. If you buy an option at parity then you do not need the underlying to move up to break-even.