Let's say I buy 1000 shares of XYZ for $10/share. At the same time I buy 10 married put contracts for $20 each, totalling $200. The put option will protect the shares against losses. Now, is there a way to also protect ("insure") the $200 amount paid for the options against losses? Or am I asking for too much?
Sell calls at a higher strike against the puts and pocket the same premium. This is called a free colar. But your profit would be limited. Google option colar. The problem: there rarelly are free collars (I guess theyt are arbed away) so the net trade is negative, but less. You also most probably are going to pay the spread on both options.
You can collar the position by selling the call at the next higher strike but that's not going to bring in $200 or anything near it. If the numbers you gave are real and just not a made up example, the stock will be of low volatility and the 12-1/2 call strike will offer pennies. Lastly, if you're going to do collars from the get go, save yourself some slippage and commissions by trading the equivalent strategy, the vertical spread.
If there was such a thing as a free collar from the outset, there would be no need for any other type of trading. The only way to get a free collar is to leg in to the position after a move in your favor.
This is not correct. You need to understand put call parity better, among some other things. UMU: let me know if you want me to PM you an answer to your question. Your question is excellent, and there is an answer. Sorry I am not posting here because I decided not to share with some people because of their attacks and also to avoid useless debates. I think you are a person looking for answers, and I will be glad to share. Just let me know.
There is no such thing as risk free trading. Who would take the other side of your trades, and why? riskfree has not shown his face on this particular board because he was run off by many others and his phony trades were exposed.
It is done. Let me know if you have clarification questions. Run things as suggested in the note. Enjoy!
Put-call parity has nothing to do with collars. Collars involve options at different strikes whereas put-call parity refers to the arbitrage argument b/t prices of European puts and calls on the same underlying, strike and expiration. Beware of those possessing the mysterious answer that only a select few possess along with the secret decoder ring from the cereal box. ROFLMAO
Of course ATM puts could fall in this range at today's volatilities at 3 or 4 days to expiration. This does not change the "offer pennies" statement.