While accumulating stock in a growing company has created wealth for many investors, it can also create risk when it results in a concentrated position. Typically a concentrated position is any single holding which constitutes 10% or more of an investor’s portfolio.
Selling the position may not be possible. Whether it be a lock-up situation, a tax matter or any other number of factors an options collar strategy may play an important role in overcoming those issues.
The collar will provide for downside protection. However in managing the downside the upside return will be limited. Regardless, there is an art in managing the collar that I will try to outline below. The trading vehicles are the put( to be purchased) and the call (to be sold).
There are a number of factors to consider when looking at this options strategy:
1: Risk/Reward. Take a looking at the annualized return that you can make if excercised on the calls. Compare that to the percentage downside if you excersise the puts if your stocks breaks underneath the strike price you are long. Ideally you will want to do at least a "zero cost " collar but taking everything into regard that is not so easy to accomplish.
2. Take a look at the volatility levels of the options you are going to trade. Ideally you will want to sell calls that are trading at a relatively high volatility level.
3. What strike price do you want to write your calls? If you want to avoid being exercised on the calls then sell one strike out of the money ( where the strikes are five dollars apart). And sell at least the "second month" options.
4. What do you do if you really want to avoid being exercised and the stock is through your strike price? "Roll your position". This can involve either moving your calls to the "next month" or buying your calls at a loss and selling the "next strike price" and collecting the extra premium to offset the loss to a degree. And keep in mind the commission costs.
5. If the stock breaks one can consider "rolling the position down" into the next month. A good time to consider this is when the calls lose most of their value and are trading under .20. LIkewise, when the stock rallies and the puts lose their value you can consider the opposite. Remember to do this in the next month, never the same month as the current position.
6. When do you put on the collar? If the stock has been breaking look for a support level. And look at the dividend calendar. If you do not mind being exercised in a few months "out" at least collect the dividend first.
There is nothing wrong with trading collars as a part of your investment strategy. Just make sure it is a suitable investment and consult with your investment advisor before initiating action. After all, there is no guarantee that you will achieve your financial objectives and you may lose money.
Thank you.
Daniel B. Stern
Managing Member
Stern Investment Advisors, LLC.
141 Trading Group, LLC.
141 West Jackson Blvd. 60604
Suite 2027
Chicago, Ill.
312-772-5517
e-mail: stern at 141trading.com
Selling the position may not be possible. Whether it be a lock-up situation, a tax matter or any other number of factors an options collar strategy may play an important role in overcoming those issues.
The collar will provide for downside protection. However in managing the downside the upside return will be limited. Regardless, there is an art in managing the collar that I will try to outline below. The trading vehicles are the put( to be purchased) and the call (to be sold).
There are a number of factors to consider when looking at this options strategy:
1: Risk/Reward. Take a looking at the annualized return that you can make if excercised on the calls. Compare that to the percentage downside if you excersise the puts if your stocks breaks underneath the strike price you are long. Ideally you will want to do at least a "zero cost " collar but taking everything into regard that is not so easy to accomplish.
2. Take a look at the volatility levels of the options you are going to trade. Ideally you will want to sell calls that are trading at a relatively high volatility level.
3. What strike price do you want to write your calls? If you want to avoid being exercised on the calls then sell one strike out of the money ( where the strikes are five dollars apart). And sell at least the "second month" options.
4. What do you do if you really want to avoid being exercised and the stock is through your strike price? "Roll your position". This can involve either moving your calls to the "next month" or buying your calls at a loss and selling the "next strike price" and collecting the extra premium to offset the loss to a degree. And keep in mind the commission costs.
5. If the stock breaks one can consider "rolling the position down" into the next month. A good time to consider this is when the calls lose most of their value and are trading under .20. LIkewise, when the stock rallies and the puts lose their value you can consider the opposite. Remember to do this in the next month, never the same month as the current position.
6. When do you put on the collar? If the stock has been breaking look for a support level. And look at the dividend calendar. If you do not mind being exercised in a few months "out" at least collect the dividend first.
There is nothing wrong with trading collars as a part of your investment strategy. Just make sure it is a suitable investment and consult with your investment advisor before initiating action. After all, there is no guarantee that you will achieve your financial objectives and you may lose money.
Thank you.
Daniel B. Stern
Managing Member
Stern Investment Advisors, LLC.
141 Trading Group, LLC.
141 West Jackson Blvd. 60604
Suite 2027
Chicago, Ill.
312-772-5517
e-mail: stern at 141trading.com
