TL:DR - Using a risk free collar with great buying power parameters, diversified underlyings, and a treasury kicker seems like a no-brainer, risk free trade, WHAT AM I MISSING???
A collar:
Own the underlying + sell the call + buy the put = collar. Caps the downside in exchange for capping the upside.
Here is is my risk free collar on SPY
Risk Free Collar on SPY Here is the actual tradeThe collar in it of itself is not a good trade, BUT the buying power required to put this on at Tasty is $6,300.
Cap Req page on my account at TastySo a 82 DTE trade as a worst case scenario of $106 profit. 1.9% ROBP (return on buying power) for 85 Days. Best case is the stock market moves higher and the trade make $606, 9.5% in 85 Days.
If I do this all year that is 4 turns, some will hit the big profit, some will hit the small profit, but I will never lose.
Treasury Kicker - With my broker I can 'double-dip' and use this buying power to also buy treasuries which only add to the profit potential.
My question is: what am I missing? Why is this not a good trade? I have them running on SPY, IBIT, and GLD currently. Max profit on these range from 9.5% on SPY to 20% on IBIT (the calls are very bid). Would love to know the 'gotcha' about this trade? TIA
Why isn't the collar strategy more popular?
I've been using the collar strategy for a few months now on European options. It's performed well and I've been able to roll the call if I get close to the strike price to avoid losing out on additional upside. I realize the last few months aren't a great reflection of when a strategy breaks down. But why isn't the collar strategy used more often? I see very little down side and lots of upside if an asset has enough liquity to roll the call when prices surge.
Videos
Collar involves buying shares, selling a covered call and buying put.
If price stays flat no loss, if price moves moderate to aggressively will profit till CC strike, if price dumps put and CC negate losses on the shares.
Curious if anyone prefers to use collars, what size account would benefit most from a strategy like this am assuming big accounts, and any feedback or thoughts from those who've ran collars?
(The more think about options, the less think about structures now and more about price action and its potential move within a predicted amount of time. This is not easy, so going long on good companies as stocks naturally rise is potentially easiest/safest way to use the leverage options provide at the cost of timing the intended move. I have earning's down now but outside of earning's, playing the short term, I haven't found anything which safe enough to consider yet aside from this initial idea of using collar.)
If I own a significant number of shares and want to protect against any and all downside, a collar is going to be my best bet, correct? Of course I could sell calls, or buy puts, but thinking most conservative approach possible. I guess my real question comes in at the strike prices. If a stock is trading at $102 and I don't want it to go below $100, what is the most efficient way to set my strikes if I plan to hold the stock long term? Thanks!
Like u/telekaster57 mentioned, you answered your own question. Buy the put at $100 and sell the call that gives you a premium equal to what you spent on your put. This will make it a costless collar. If you want to give yourself some more upside you will have to pay for that (when the premium that the short call brings you is less than the cost of your put). This would be similar to buying insurance and paying a premium for it.
If you don't want it to go below $100 in this case, then set your strike at $100. Keep in mind, collar strategies do limit your upsides potential so if you want to own a stock long term, setting a long term collar probably isn't the best idea since your shares will inevitably be called away.
So, when you collar (buy a put) a CC, you can skew it so that you get a nice credit, but protected against strong moves to the downside as well. Obviously take less of a credit. But still, can basically fund your weekly/monthly protection and walk away with a credit should the trade play out...Price goes up a little, still in credit, goes down a little, CC works as well, goes down a lot, CC works and Put works etc etc etc Does anyone do this? Thoughts?
I am new to this and have a bunch of NVDA stocks that I want to hedge by going short call (covered call) and long put (protective put).
How and where do I start? I have only once bought an option in my life and lost all the premium on it, because i was betting against the market during a major global pandemic and surprisingly all the markets went up! So this time I want to do it right. Therefore I have these questions:
- Do you have any special tools outside of what the broker provides, that you use to monitor how healthy your options are?
- Is there anything else apart from news, underlying movement and the greeks that I should monitor?
- When talking about the greeks, obviously this is the thetagang, hence we focus on the time decay, but how much attention do you put on the others.. like the delta or the gamma?
- I know that in the event of an assignment I will have to deliver the shares.. but I don't want to do that, so is the only option I have then to buy back my call ...by "closing the call".. I am aware that this might result in some money that I lose since the option would be ITM and therefore more valuable than before.. how often has this happened to you? Is it advisable or should I just let it go and buy it back at the next dip?
I am trying to understand this and I think I am just overthinking.
Suppose you have Stock A trading at $100 and you buy 100 shares of it. You buy 1 long put with a strike price of $95 @ 1.00 and you sell 1 call with a strike of $105 @ 1.00. (Assume this is at expiration)
You invested a total of $10,000 and your Max profit is $500 while you have a Max loss of $500.
Suppose the stock grows to $150 a share. Do I subtract $15,000 from the $10,500 value to find the total value of the portfolio now? Or is my Max profit still $500?
your portfolio value is capped at stock price of call strike = $105/share
=$10,500
At $105 the girl you sold call option too will exercise it, give you $105/share.
And floored at stock price of put strike = $95/share
=$9,500
Your portfolio value will never reach $15,000
I collar is usually used to protect a stock position. The idea is you buy the put and help fund it by selling the call. You trade upside potential to protect against downside potential.
If you just want to bet on a stock within a certain range, a stock you don't currently own, doing a vertical spread is a much more efficient use of funds and has the same net effect. Limited up and downside.
Note: This is not an attempt to get you to subscribe to my Youtube channel. I don't even have one. This is also not financial advice. I'm sharing the idea so you can decide to ignore or explore more.
Recently, I've been liking the collar a lot. I don't do them often before, because I don't like holding stocks, and the risk/reward ratio doesn't make sense for me. But recently, in some high flying stocks (TSLA, SQ, etc.), collars started to make more sense. I've been doing them with some success (both in terms of profits, AND downside protection) in the past month.
For those who don't know, this is how a collar works:
- Buy 100 shares of stock
- Buy a protective put at or below stocks' cost basis
- Sell a call to cover part or all of the put's cost
The strikes of your put and call are entirely up to you. For me, I buy the put closest to the shares' cost basis. E.g. If I buy ABC for $100/share, I buy a $100 put if possible. I then sell a call so that if the stocks got called away, my risk:rewards ratio would be at least 1:2.
Because of the recent run up in tech stocks, my shares almost always got called away, so I realized max profits. However, in the last week, tech stocks have dropped almost 10%. I've been well protected and my loss was minimal. This doesn't work on every stock, and doesn't work for the same stock all the time. Explore and see what works for you.
I'm not going to post my trades, so don't need to ask. I don't have that kind of time. Feel free to go explore in your brokerage app.
How many here currently own a Collar as a hedge against a sizeable market devaluation, aka, crash?
What vehicle did you use? $SPY, $SPX? What expiration did you use? What strikes?
I'd like to hear some strategies?
The Installment Collar (which might also be called a Calendar or Diagonal Collar?) basically has one buy long term puts and selling short term calls on owned shares.
There a plenty of variations on this strategy, and it's quite flexible in terms of risk/reward management. I've been testing some approaches, given certain constraints, that seems to provide decent returns for minimal risk and effort.
Currently, my plan is to buy 100 shares of SPY, buy an ATM PUT that expires in ~2 months (say, July 17th), and sell weekly/bi-weekly ATM CALLs. The choice of selling ATM PUTs/CALLs is inefficient, but "effortless" in the since that you'll know your total risk upfront (i.e., the cost of the PUT) and you'll know you're semi-weekly reward upfront (i.e., you know what you take home from the CALLs). You profit when the premium you've collected from selling CALLs is greater than the cost of the PUT.
This strategy works well in the current market conditions as implied volatility it relatively high, making the difference between the cost of the PUT and the cumulative premium of the CALLs high. This means that a potential risk would be that implied volatility decreases, causing the premium on the CALLs to decrease. This is why the choice of buying a mid-term PUT (versus something longer out which would produce more profit) is incorporated here.
The choice of SPY is also important since (a) it has excellent volume and bi-weekly options, (b) it's less volatile than company stocks or most other ETFs with good options, and (c) it has decent dividends. Again, this adds the the "effortless" aspect of this strategy, as it's a safe choice for investing in general, but obviously more active selections can increase such gains.
At the onset, we buy (or already own) shares of SPY, buy the PUT, and sell the CALL. By the time the CALL expires, either the price increases, causing the CALL to be exercised and us losing the stock (or we can roll it up), or it stays the same/decreases, causing the CALL to expire worthless.
If the price stays the same/decreases and the CALL expires worthless, we can sell another CALL against it (and so on). If the price decreases significantly, our losses from holding the stock is offset by the increase in value from PUT. Here, we can sell the PUT (yielding back the difference), then buy another ATM PUT for the same (or possibly future, to roll forward) expiration. The idea is to continuously keep our PUT near the price of the stock to limit downside risk.
If the price increases and the CALL is exercised/rolled up, we buy the stock again/continue holding it and continue to sell CALLs against it. We can even roll the PUT up and back, at the cost of time value, to capture upward movements (as long as value gained offsets the time we lose to sell CALLs against it).
Based on the numbers of I've been working with, this would produce a decent profit (conservatively +1% per month) if nothing drastic occurs in the market. However, the real value of this strategy is that it caps loss, which allows us to leverage margin efficiently. Since we can be highly leveraged, the premium and dividends we receive are that much more valuable without risk of a margin call.
This also means that sudden decreases in prices aren't felt by our strategy (of course, neither are increases). Although I'm bullish, I wouldn't be surprised if another crash occurs in the near future. This strategy mitigates this risk entirely, since the value of our PUT will cover any loss in value from our stock.
The lack of upside potential is probably a turn off for many people, since selling ATM CALLs basically guarantees no upside potential beyond the premium of the CALLs we sell. Of course, I'd say this is the price to pay for such consistent income.
It seems the true risk, as I mentioned earlier, can come from a decrease in implied volatility. However, volatility doesn't tend to sharply decrease (only increase), making such events rather predictable. This might make this strategy unfeasible in smoother markets (i.e., pre-COVID), but currently it looks ripe.
I'm trying to spot flaws in my logic or other potential risks. Obviously what I described here is quite low-level, inefficient, and naive, but my idea is to replace a simple "buy and hold" strategy with something a little more predictable (and that can be refined over time).
Thoughts on this? I've tried finding similar strategies, but, other than the "Installment Collar" description, it doesn't seem too popular. It's certainly not the most lucrative strategy, but it's safety is quite valuable to me given my circumstances and the current state of the market.
I follow this guy on Youtube Market gains that is selling CSP's on TNA. https://www.youtube.com/watch?v=hoOVKa4ZHFo That's a little scary for me especially with a leveraged etf. I'm trying a very similar strategy as yourself buying 3 month puts 20% otm and selling weekly calls 1 strike higher for TNA. Your strategy looks like it will work out great! Please keep me posted on how it turns out since I'm trying this installment collar strategy tomorrow.
With those call premiums you are selling are you using that to buy even more of SPY?
It's a legit strategy. Slow moving but consistent. No real downside danger. Look at buying a 2 year out put and rolling it every year if it's otm. If it's itm just hold onto it.
Let's say I opened a collar on AMD
+100 AMD @ 110
-1 OCT20'23 110 @ -2.80
+1 JAN19'24 105 @ 7.00
I would short shares instead of buying the put but it's not allowed in the account I'm using.
Where do I lose with this strategy? Assuming I close out the position at short call expiry, to realize any gains from the put.
How many of investors use collar options strategy in their portfolio? If so, is it only for part of portfolio or for entire portfolio??
Considering the uncertainty and volatility expected from geo-political risks and new administration policies combined w rich market multiples, I’ve been planning to use collars as a hedging strategy..
Long time lurker of this sub. Dont really do options (yet) as im more involved in algotrading in equities & forex markets. So i apologize in advance for this noob'ish question.
I read how mark cuban used costless collar strategy (article) to protect his newly built wealth when he sold his company to Yahoo. Basically buying a put option as well as selling a call option to protect his gains. So I had an idea - I know lots of "so-so" rich people whos wealth is concentrated in few stocks... so why not pitch this idea to them?
Questions:
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Is "perfectly" costless collar strategy viable? i.e. for the stock owner to do this with ZERO out of pocket. If not, what are the issues?
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I'm *guessing* that really rich people ($50+m assets) already do this... am I assuming too much? Do brokerages and fund managers already do this? If not, why not?
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Not sure if any sub members can answer... but roughly how much did the wall street bankers make in commission for helping Cuban implement this strategy?
Hey, i've been practicing IFM stuff and I was curious about the collar (writing an out of the money put and buying an out of the money call) option strategy. I understand the use of buying a collar together with a stock (or other asset) but when I looked around on the internet I couldn't find any references to buying a collar without also owning the underlying stock. Is there any use for a collar other cheaply protecting against downside risk of a stock you own?
Do you mean buying an out of the money put and selling an out of the money call? I think that is what people generally mean when they talk about collars.
If you hold the underlying as well then this basically collars the price between the strike of the put and the strike of the call.
If you do not hold the underlying then you have written a naked call option and bought a put option. You would be exposed to unlimited losses if the stock price were to rise. I think it would be an odd thing to do for this reason.
If you don't want to own the underlying but want to construct a similar payoff with just options you could do a bull call spread or bull put spread.
But that depends on the strike prices you would want. If the spread between strikes is less than the cost of initiating the spread, it will always loose money. For instance, this happens in a bull call spread if you buy a call too far ITM and sell a call not far enough OTM.
Buy hundreds of QQQ shares.
Sell OTM covered QQQ calls against those shares.
Use the cash from selling the calls to buy TQQQ puts.
If QQQ goes up, my shares increase in value up to the strike of the short calls. The TQQQ puts expire worthless, but who cares, I bought them with the cash I got from selling the calls.
If QQQ goes down, TQQQ goes down even further, so I profit from my TQQQ puts. The value of my QQQ shares goes down, but given enough time, it will eventually recover (it’s not some shitty meme stock).
If QQQ stays flat, the short calls and TQQQ puts expire worthless, so I don’t gain anything, but I also don’t lose anything, so I can just sell more calls against my QQQ shares and buy more TQQQ puts.
As far as I can tell, this is a win, win, win situation.
I’ve been using collars with SPY for a while, and that’s been fine, but I’ve never thought of using puts for a leveraged ETF like TQQQ as the hedge.
I'm trying to understand the benefits of collar strategy.
Let me use a real trading example that I found here: https://twitter.com/silberschmelzer/status/1577817926664704000?s=20&t=Kj3p8GYd3iyTs2r5V5yCxg
In summary:
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Bought 100 shares of LAC for $38.55.
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Sold 1 covered call LAC Oct21'22 $38 CALL for $343 in premium.
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Bought 1 protective put LAC Nov18'22 $30 PUT for $142 in premium.
Overall $343 - $142 = $201 has been collected and there is a protection at ~20% below the stock entry price.
If LAC plunges more than 20%, you would be protected with the long November put.
However, what if LAC slides slowly? Say that November comes and LAC closes at $31. This would make the protective put worthless. If you want to repeat the process again where you sell a $38 call and buy a $30 put, you will lose money since $30 put will be much more expensive than the $38 call.
Therefore my question is, how does collar protect when the stock slides slowly?
Hey everyone, this is my first post here. I recently started a blog/journal of my option trades to try and become a better trader over time. Here's one of my stories on AMD. I actually enjoyed writing it quite a bit ! Hope my insights on myself can be of help to some people.
Adventure #2 - Covered Calls
There is something quite nice about collecting premium on options and letting them expire worthless. If you take that on its own it's as if someone gave you money. Obviously there's a lot more to that! Right before AMD earnings, I realized that 4 days out ATM calls were selling at around 60% IV. I thought I'd try covered call selling right there. It goes up, I collect my premium and nothing else. It stays flat, I collect my premium. It goes down, I lose less money ? Yeah that's not great. So I decided to try another strategy: the collar. On 2018-07-23, I executed the following trade:
BTO 100 AMD @ 16.99$STO 1x AMD 2018-07-27 16.5 call @ 0.86BTO 1x AMD 2019-01-17 14 put @ 1.08
I fixed the last problem; I limited my downside risk to 14$ in exchange of a premium. It also protects my position up until January and allows me to sell calls every month for a continuous 'income'.
...Or so I thought
Good earnings come, AMD rises up and ends the week at around 19.50$. Essentially I collected the premium and that's it. So I realize; I'll just sell another call one month out and I'll do that until my put expires. So I sold another call which expires on 2018-08-31 (this friday).
Now, I don't know if you're aware, but AMD closed today at 25.51$. So again, I'm still only collecting premium and gave up around 40% of upward gains (out of around 50%). What's more, and what I hadn't realised in my initial analysis, is that my protective put is actually pretty worthless currently. If AMD was to go back to 16.50$ from now to January, I would actually register a loss on this whole trade, even if I keep selling ATM premiums every month. That's because I did not fully participate in the upside and became exposed to downside risk because of my long expiration put.
However, I did make some adjustments along the way. Because of the bullish nature of AMD around the 22 of August, I decided to double down on my strategy and purchased a second complete collar with AMD sitting around 20.35$; sold a 21 call for 0.85$ expiring September 28th and bought a 18 put expiring in January for 1.25$ Now that I look back onto it, that call seems pretty cheap for a stock I considered bullish in the short term.
Last Friday, as AMD had rose I believe 4% intraday, I was starting to pinch myself for having limited my profits so much on this trade. Mind you, I must have been around +1000$ on this combined stock at this point with both of my covered calls well in red territory. So I looked at the implied vs historical volatility and felt like the IV was pretty low for the current upward movements AMD was experiencing. So I bought a long 24.5 call expiring September 28th for 0.85$ to at least participate in upside movement without closing my current trade.
That is still my current position. Here's what the profit graph looks like:
Link
I'm pretty happy with it now. It rose nearly 10% the last two days; I really didn't realise that owning a rising stock and not participating in profits would be so emotionally taxing on myself ! At least now I have a well established trade with a nice profit curve and I still participate in rallies. I'll see what I'll do next when my 19.5 call expires on friday. My plan is to buy it back before close (not getting exercised). Depending on my outlook on the stock at that point, I'll see if I sell another one. I mean, if AMD keeps on racking 4%+ days up until friday (holy shit), I'll probably sell one cause the IV will be pretty high at that point if that happens.
TL;DR: Continuous income from collars slaps happy trader in the face
Is this just a story of you kneecapping yourself and not believing in the Sue bae dream?
You took a very simple and profitable trade and complicated the heck out it plus added a ton more risk.
Just sell calls above the stock price and let the shares get called away, or roll them up for a credit and possible up in value. If they get called away then buy more stock or sell puts to get the stock back . . .
So i came across a mutual fund that operates a strategy going long 10-15 high yield stocks, selling calls 5% OTM and buying puts 5% OTM.
They put the collars in place with 3 month terms because liquidity is not great beyond 3 months.
They claim it's a strategy that should generate 6% income primarily (including Australian tax credits) with some limited upside/growth potential. They claim vol skew isn't an issue and that the collars are almost zero cost.
What, if anything is your criticism of the strategy? Their view is that it's a good strategy for a late-stage bull market.
Sounds like a great product to sell
There is a constant drag on returns due to SKEW. Most of the time, the market won't drop more than 5% in a month (I'm talking about U.S. markets, you'd have to look at what the Aussie market stats are)--so it's purely disaster insurance.
If this was done in the U.S. markets, your expected result is that you're only hedging the absolute outlier moves while creating a constant drag (debit) on the overall account from the net debit/cost of the hedge. In addition, on an explosive upmove, you won't be participating fully.
I think it is a fantastic marketing move. OTOH, I think it's a fairly dumb setup in practice. I might do it if I was purely running it as an income play but then why not look for instruments that are better designed for income, e.g. not equities?
I might rather see them sell a 5% OTM put and a 5% OTM call. That should be pretty good income.
If you look at the IBIT option chain right now.
The $55(ATM) 2yrs leap puts cost about the same as a $90(63% OTM) call. Both are around $18.
Meaning that if you buy IBIT shares now and run a ATM collar on it you literally can't lose money for the next 2yrs while having a 63% upside.
Does this sound like an insanely good trade or am I missing something?
Can someone tell me if my math aint mathing right before I liquidate my entire portfolio and put in it IBIT?
edit: I guess the biggest risk over here is if my calls becomes deep ITM before expiry and my shares + calls get called at with insane extrinsic value