Collar traders

Discussion in 'Options' started by luckyd1976, Oct 21, 2009.

  1. When you find the trade moving...

    Do you generally ???
    A) Make adjustments or
    B) Close down the trade altogether and wait til next setup
  2. Not everyone trades the same, but...

    Many trades have limited profits and limited losses. But most of the time, losing the maximum is a bad result and the trade should be adjusted to prevent that.

    But, to me the collar is a bit different.

    I recommend owning a collar to manage risk. But, I suggest starting with put selection. Choose a put so that if you do lose the max, it's an acceptable loss. Then choose the call to complete the collar.

    The benefit of this method is that

    a) Collars are only used for your most conservative positions. It's far more efficient to trade an equivalent position - sell the put spread - instead of owning the collar with more aggressive trades.

    b) When the loss is acceptable, you have the luxury of ignoring the trade and hoping the market reverses. With other positions, ignoring the trade is the path to ruin.

    Thus my reply to your question is: neither. I hold.

    But if your risk of loss is unacceptable, I would adjust if and only if you want to own the adjusted position. Do not adjust just to do something. Better to exit the trade than do that.

  3. It depends. Assuming a long collar:

    If the position is near its maximum gain and there's a decent amount of time remaining, get out. It makes no sense to hold for the last nickel while risking dollars.

    If the position is heading south, consider closing as a stop loss or adjusting to reduce the loss.

    As a general rule, I would not roll the collar to the downside unless expecting a reversal and willing to ratio. Would only do it to the upside if bullish.
  4. Thanks. I've been paper trading some Collars. But all of my adjustments have been just killing me.
  5. I don't know what you're doing but the position gets you before the adjustment do.

    Imagine a stock at $52.50 and let's pretend that you could put on a 50/55 collar for free. Prior to expiration, if the stock drops, you'll have put gain to offset some of the loss. But on an expiration basis, you're going to lose a net of 2-1/2 pts before the put is ITM.

    Let's say that for every 5 pts down you roll your collar down. In a make believe world where that 5 pt drop and roll occurs at each expiration, you're going to lose 5 pts on the stock for every 2-1/2 pts the put makes. Now what adjustment is going to fix that?

    The short answer is that a collar is equal to a vertical and they're directional. You have to get that right to make money. Get that wrong and you're just adjusting a losing position.
  6. By 'just killing me' do you mean that you tried to time the market and lost money as a result?

    Or do you mean that risk was too high and you made a good, risk-reducing adjustment that turned out badly?

    If you are timing the market, that is not an adjustment. That's just a gamble and has nothing to do with collars.

    If you made the best decision that you could have made under the circumstances, and the results didn't pan out, that's just the way it goes sometimes. Don't beat yourself up over making intelligent trades that don't work out.

    Collars are not positions to be adjusted. If you set it up correctly in the first place, the maximum loss should never be large enough to hurt. And if you are not satisfied with the profit potential of the position and buy back your call in an effort to earn more money - then you are using the wrong strategy. That is an inefficient way to use collars.

    Collars are used for slow, steady growth - with excellent insurance against a big loss.

  7. Every investment is essentially timing the market and more so with options since ther's an expiration. Doesn't matter if it's covered calls, iron condors or buying long or selling naked. It's just a question of how risky your gamble is :)
  8. Of course I agree with that statement.

    My point was that collars should not require any adjustments.

    If the OP is making many adjustments, he would be far better off selling a put spread - which is equivalent to the collar.

    Then his perspective would be different. I'm guessing that the biggest problem for him is deciding when to lift the short call leg.

    Selling the put spread eliminates that temptation.

  9. I had a gimpy dog with a bad bladder who had a similar problem.

    >> If the OP is making many adjustments, he would be far better off selling a put spread - which is equivalent to the collar. <<

    Somewhat off topic but once upon a time before I had the familiarity and confidence to trade equities outright, I used to trade the stock component of covered calls and collars intraday, attempting to scalp nickels, dimes and occasionally more in order to bump up the yield. I'll admit that it's a false sense of security that you're not at risk but unlike paper trading, it makes you stay focused on every tick and get that feel and discipline for the real thing.
  10. False! When are you going to seek someone to teach you (and of course stop trying to teach others)? You do not have a sense of shame (you do not know how to calculate probs, you do not distinguish between touch and expiration probs, you do not understand equivalencies, etc...)
    #10     Oct 25, 2009