Fellow traders, I have come across a dilemma and am hoping for some fine advice. Here is the dilemma. Everyone agrees that a collar has the synthetic equivalent of a bull call spread. However, if I want to roll up the put in my collar I simply sell my current long put and buy the next higher strike one. In the bull call spread, however, there is no put to roll up. So, how do I roll up a put in a bull call spread? This should be easy to do since it's exactly the same synthetically . Your answers much appreciated in advance. daddy's boy
You just sell a call vertical, where the short call has the strike of your current long call and the long call has the strike of a new long call. For example, you are long 45/50 call vertical. To roll up the 45 call to 47.5 you sell a 45/47.50 call vertical, thus leaving you with long 47.50, short 50 call (i.e. long 47.50/50 call vertical).
If the two positions are synthetically equivalent then applying identical trades to both positions will result in two further synthetically equivalent positions. Rolling up the PUT in a collar is selling out the existing PUT and buying a higher strike PUT as you stated: these two trades constitute buying a PUT debit spread. With your bull CALL spread, to make the same adjustment, perform exactly the same trade! Buy the PUT debit spread. Alternatively you could sell the synthetically equivalent CALL credit spread! i.e. you are just rolling up the long leg in your original bull CALL spread. Your bull CALL spread is also the same as a bull PUT spread at the same strikes. If you had that position, then rolling up the PUT would again, be identical. EDIT: Another way to look at it is that your collar adjustment is simply taking you to another collar i.e. you are going from a wide vertical to a narrower one. This is actually reducing risk in the position. Presumably your stock has gone up and the vertical has made gains. By rolling up, you are taking risk off the table. EDIT2: Dang, that MTE is the fastest gun in the west. Good luck! MoMoney.
Thanks guys - you're tops! This thing was driving me nuts! I must say ET is fantastic, thanks to guys like yourselves. Best daddy's boy
The conclusion I have to draw from this revelation is that there is no advantage trading collars over trading the equivalent bull call spread. I was under the impression that the collar was slightly different from the BCS in that the stock in a collar isn't affected by volatility or time decay, whereas the options in the BCS are. What do you guys think? Daddy's boy
In reference to volatility and decay, you could think about it this way: you have the exact same number of long and short options in the collar vs. the vertical and at the same strikes.