8 Ball, you requested that I expand upon (1) in my posting this morning at which time I stated: "(1) I don't always have shorted puts, because their only purpose is to help defray the expense of the long calls." The first two parts of a Regular Collar are (a) long the stock and (b) long the Puts. These two legs, are called married Puts. In the case of a Reverse, it is just the opposite. The first two legs are (a) short the stock and (b) long the call. Together these are referred to as a married call. The married Call is a very good strategy. Assume a stock is selling at exactly $85. Let's assume further that we do the following trade: (1) Short 1,000 shares of UNDerlying at $85 and receive $85,000 in shorted proceeds. (2) Buy 10 April $85C @$10, for a total cost of $10,000. Total net credit (exclusive of commissions) is $84,000. For simplicity, let's assume that the delta of the Calls is 50, or +500 deltas for the 10 calls. The shorted shares have a negative delta of 1,000, so the net is a negative delta of 500. Thus, at this point we have a bearish trade. For reasons which I'll go into in greater depth in subsequent postings, I really don't care which way the stock moves, as long as it moves $5 in any direction during the month. At this point, let's just concentrate on the maximum risk, which is $10,000, the extrinsic value of the Calls at the time of purchase. But, this potential risk of $10,000 maximizes only if t he stock is exactly at $85 and only at April expiration. So, here's the answer to your question in terms of shorting the Puts. As I said in the quote, the only purpose of the Put is to collect premium in order to profit from theta decay. That theta decay profit accomplishes nothing but reduce the $10,000 risk referred to in the preceding paragraph. I'll stop here for now. 4Q
Don, you are completely correct in stating that Calls are slightly more expensive than Puts. It's something that I am aware of and have made a decision to just live with it. Good point. 4Q
Bob Can you show us how this strategy (reverse collar) is superior to the synthetic equivalent bear put spread? Also, how is the 'married call' (aka synthetic put) superior to the synthetic? I hope you won't be suggesting that put/call parity breaks down . daddy's boy
Daddy's Boy, Sorry about the math error. Of course you are right. It is $75,000. That's what happens when one posts late in the evening. Regarding your second question of whether one strategy is superior to another...No, I can not show whether one is supeior to another or not. I don't even care. I have studied the collar, reverse collar, married puts, and married calls for a long time. I don't do collars or married puts simply because, for me at least, I don't want to lay out the requisite working capital. I have always been fascinated with the idea of shorting stocks (subject to the four caveats I mentioned in one of yesterday's postings). I believe in leveraging and hedging. While the subject of this thread is "Reverse Collars", I got involved because Eliot asked me to (see the first posting on page 1) and I felt I had something meaningful to contribute. My favorite way to trade is the combination of short stock and long calls, with an occasional use of shorted puts. My experience is that this is: (a) easy, (b) fun, and (c) consistently profitable. But, for sure it is not the only fish in the pond, so I don't see the need to compare to a synthetic equivalent or otherwise. Thanks for your postings, especially the math correction. 4Q
Q4 , can you show us how you planning to adjust/roll collar position ? Post a position , then I will make up a stock price action , and then you will make an adjustment . Deal ? Then everyone can see if collars are "consistently profitable"
IV Trader...sounds like a plan. I don't know where this will end up, but what the hell, if I fall on my face and end up looking foolish, so be it. Let's start with: (a) Short 1,000 AAPL at Friday's closing price. (b) Buy 10 AAPL Jul $85C at Friday's closing Ask price. (c) Short 10 AAPL Jan $85P at Friday's closing Bid price. Note: Normally, I would start out with less than 1,000 shares. But, since this is merely an academic exercise, let's use a round number. By the way, I am aware that (a,b, and c) above constitutes a synthetic calendar spread. But, the reason for doing this is that AAPL is presently in the midst of one of its periodic current month IV spikes. therefore (c) above is simply an attempt at a quick Vega play. Otherwise, I would have been happy to just start with (a) and (b) by itself. It might have spiked too soon. Earnings announcement for the quarter ended December 2006 is scheduled for after market close on Wednesday, January 17. Finally, IV Trader, as we go down this road, you and the others will quickly see that I am not really doing the defined Collar or Reverse collar. Having participated in these Discussion Boards for many years I long ago came to the conclusion that far too much time is spent on definitions and semantics. To my way of thinking, the definitions and common terms are nothing more than starting points.
LOL , Bob , so suddenly its a Vega/event related trade ? Change in vols was NEVER mentioned on the other site , it always was about neutral trade and some magic rolls .
AAPL long 85 July long call = 11.7 Jan short put= 3.80 Stock seats around 85 and tanks to 70 after report. Vols collapsing to 30 (sv) : Gain on stock = 15,000 Loss on put = 11, 200 ( and exp) Loss on call = 9,700 PnL = (-5,900 ) Your move , Bob.
IV Trader. I misunderstood you. I didn't realize that what you were talking about involved playing with ourselves. Rather than you or I doing "what If's", why not wait and let AAPL, and the options markets tell us what's going to happen. Also, I didn't say that this was a Vega event. The Vega comment related only to the sale of the Puts. Item (c) in my posting. Take a look at the IV charts of AAPL for the past few years. There is always an IV spike around earnings time. As I said it appears that the spike came early this time. Normally I would have waited to write the Puts; however, in the spirit of cooperation with you I decided to hypothetically do it now instead of waiting for the skew to go even higher. In the earlier posting I made reference to the fact that the earnings announcement will be after closing on January 17th, two days before January expiration Friday. Today, I don't know what I will do between now and then, but rest assured, I will not allow myself to be vulnerable in either direction on that Wednesday afternoon prior to market close. Again, this paragraph relates only to leg (c). At the end of your posting when you said "Your move Bob" ... No it isn't, it's the markets' move. Have patience. I will be making moves. With either Collars or Reverse Collars, it's a long-term proposition...maybe months....maybe years. It's not about simply placing a trade and following a pre-established exit plan. It's about perpetual adjustments. 4Q