Help Solve Collar Position

Discussion in 'Options' started by setu, Nov 5, 2009.

  1. setu


    I bought a stock at 500 & bought 500 Put for 5.0 & sold 600 Call at 2.0

    Now the stock has gone to 800 and I want to catch more profit than initial 100.0

    Is there a strategy to do this without liquidating the whole position besides buying back 600 call ?

    Thank You.
  2. Enter a new collar transaction...
  3. spindr0


    I assume that this is a hypothetical because it's hard to believe the numbers.

    As to your question, no. You could roll the collar up but you'd be tying up a lot of money. Allow assignment and buy the higher strike vertical instead of the underlying.

    You could make add'l coin if you were playing for a reversal and got it but that a different story.
  4. You can't catch more profit because you gave it up when you sold the was part of the deal.
  5. Here is a suggestion that you will find very useful.

    Don't trade the collar next time. Instead, trade the position that is exactly equivalent. Sell the put spread.

    If you were long the 500 put and short the 600 put, would you be worried about buying back that put and selling another at a higher strike price?

    I doubt it.

    When you sell the put spread, you learn to appreciate it when the stock rallies and you make the maximum profit available from your spread.

    Your desire to make more than the maximum allowed by the strategy you chose is not a good thing. It will hinder your ability to think straight.

  6. ptrjon


    yeah, you are in line to receive the maximum profit you could have when you entered the position. You can't have your cake and eat it too in this situation. The position you entered gave you a maximum return no matter if the stock is at 600 or above.

    You win!

    In the future, I'd say don't be too afraid/too bored to just be long on a stock- especially in a bullish environment when money is entering the market.
  7. spindr0


    It's one of the hardest things to do but when you feel absolutely the worst about the market, it's more often than not a time to be buying rather than selling. Sadly, many people wait for a market advance like we've had since March before feeling good enough to go long.
  8. A few comments:

    1) Spin, you are bang on.

    March was a great time to be doing these credit put spread/ collars. Now, it is more questionable, however. The SPX has already gone from 667 to 1069. The big question is: will it continue to rise now??

    2) By the way, I can't believe those numbers are correct. At the money 500 puts for 5 and WOTM 600 calls for 2??? A more realistic version would have the puts closer to 20, possibly even more..

    3) In terms of Mark's comment about credit put spreads and collars being exactly equivalent, but still recommending the put spread version, some readers may be wondering why.

    Here's my take on the matter.

    The put spread requires less trading (two transactions and bid-ask spreads vs. a stock, a put, and a call), yielding a small but significant savings in commissions and probably in trading costs. Also, at expiration, the two put spreads would be worthless, meaning that getting out would cost nothing. In the other situation, getting out would require the selling of stock and repurchase of the call, both of which would induce a little slippage (ie..transaction cost) So, overall, it is a little easier and cheaper to go that route. (Margin costs are also a factor)

  9. Agree. AND

    It's often easy to exit the put credit spread for a nickel or two, and it's much more difficult to exit the collar.

  10. How would you "trade around the core position with a credit put spread? Having a collar allows dynamic hedging by scalping and/or building your equity position as the market bounces off support/resistance levels.

    Unless I'm missing something, the best a bull put spread can do is adjust and roll the spreads as the market fluctuates from support and resistance levels. However, that is so much more expensive with options, as compared to stocks.

    btw, there's some literature on calendar collar hedging, by Tsuei Consultants that discusses dynamically hedging calendar collars.

    IMO, it's very difficult to dynamically hedge a collar if the market is trending, particularly against the short option position.

    #10     Nov 9, 2009