I'm long the stock and want to do a no cost collar by selling OTM covered call and buying OTM put. It seems like it's next to impossible to do a no cost collar on it unless you want to take some downside risk by going for a lower strike put. All the strategies I've checked out involve debit. Is that pretty much the cheapest way to hedge the downside? Thanks!
I know of a no-cost way to hedge, but it will cost money to put it on... If you got a large position in GOOG and want to insure it, just purchase the insurance and buy the Put. The collar allows you to get the insurance for less in exchange for giving up some upside profit but it depends on how badly you need the insurance. If you want to insure your car or house, it wil cost you but it is worth it if you need it.
I have just enough GOOG to purchase one put and sold one covered call. I am still trying to understand the way to trade collar strategy. Correctly or not, this is what I have done. Maybe, some of you more experienced traders can point to me what I have done wrong. I already know that I sold my call too soon. 1. Last year, I bought 100 shares of GOOG when it is at $280; bought one $260 PUT; sold one $310 call with small debit. 2. Beginning this year, I let my put expire and rolled up my call to $360 call with small debit. 3. Recently, I rolled up my call again to 2008 $410 with small credit and bought one June 2006 400 PUT. My current cost base is $31,200 ( basically, it is the origianl stock $28000 + put cost $2290 and some minor adjustment credit/debit ). My plan: 1. Come June, when my put expires, I will need to buy another put for protection. 2. I rolled up to a 2008 LEAP covered call, so I have a long wait before I can either roll up/out again, or buy back if GOOG goes down. Unfortunately, GOOG does not pay dividend. Thoughts?
FH2000 Perhaps I could make a suggestion. In options trading one wants to sell premium and take advantage of time decay. Thus one would sell a call with about 1 month or so to expiry. After expiry you then do the same for the following month and so on. This works well if your stock continues to climb. Furthermore, to insure yourself against disaster you purchase a put. When one purchases an option it is usually wise to get as much time as possible if the reason for the purchase is insurance, as is the case for you. So, to sum it up. You want to buy a long dated put and sell a short dated covered call. For some reason you have done it the other way around. The strikes you choose depend on your risk/reward appetite and prediction for the underlying. Remember also that you can always buy back your short call and sell a closer month, i.e. you don't have to wait until 2008, lol. daddy's boy
Think about doing a bull put spread it is the synthetic equivalent of a collar with fewer positions (2 instead of 3). When comparing the cost of each be sure to consider the interest you get on the un-invested cash of the bull put spread. If your broker pays decent interest on cash you should see both positions having a very similar P/L profile. If your broker pays decent interest on cash the bull put spread should be superior because it's easier to manage fewer positions and there are lower transaction costs. Don
(I typed a reply but not sure what happened to it. Here it is again.) Thanks for the suggestion. I am taking it in for furture consideration. My original trade (stock, put, and call) were done on the same day. This was kind of an experiemnt. If my put expires, and stock gets called away, I will earn 8% for a 3 months of work. GOOG then zoomed up so far and went way passed my call strike. I decided to roll up my call to attempt to capture some gain, and I did that twice. I had to roll up for $50 strike increment and 9 months out in order to make my call spread trade with small or no cost. That is why my current call strike is below the stock price, to answer OP's questions. If my stock gets call away in 2008 (20 months from now), I will earn 32% less put cost. If there are call strikes away, I will roll up again by then. LOL. When my put expires in June, I will look into LEAPS put premium and decide which put to purchase again. Thanks
There is only one way to trade and think of a collar strategy and it is implied in the strategy's name. Collars are done to lock in profits while protecting from downside risk. You wouldn't want to collar any stock unless you are bearish or have nice profits and want to protect. Many times collars are used for hedge on restricted stock or options as well. Employ a collar if you have profits and don't mind missing out on more profits. Basically, you think the stock is overextended. Collars are mainly for locking in gains, nothing really complicated there. They really only make sense if you are familiar with the underlying and have some basis for turning from a bullish stance. They cost money, but are designed so that you can keep hold of your stock. For instance collars are an effective strategy after earnings have been announced and a dividend is upcoming. Many times stock will rise into the ex-date then start to sell off afterwards. Collar going into ex-date, keep the stock, collect your dividend and make money on the puts as the stock decreases in value post dividend. As it has been stated before by almost everyone, there is a strategy for every situation, you just have to know what's the situation. And you must also realize and live by the maxim, "There is NO FREE LUNCH." Good Luck
There are a number of ways to use collars to generate profit rather than just lock in pofit. J L Lord has a book at randomwalktrading.com. And, no, I am not affiliated or spamming. As a matter of fact some traders only trade collars and make a nice living but one does need the capital to go long the stock. Daddy's boy