The Collar Strategy Using the BCI Trade Management Calculator + A Sample Trade Video

The Collar Strategy is a covered call writing-like strategy where a protective put is added to the trade, thereby establishing a floor and a ceiling with a maximum gain and a maximum loss. This article with analyze a real-life example NVDIA Corp. (Nasdaq: NVDA) to demonstrate how to implement this strategy.

Uses for the collar

• Protection in a contract period to protect during an earnings report (I, typically, avoid ERs completely)
• Protection during bear & volatile market conditions
• Reducing risk during uncertain times (Brexit, Fed announcement, elections etc.)
• Protecting appreciated stocks
• Insurance when we can’t be near a computer to monitor portfolios

Entering the 3 Legs of a collar trade

• Long stock (buy the shares first)
• Short (covered) out-of-the-money call (ceiling)
• Long out-of-the-money protective put (floor)

NVDA collar option chain

 

• NVDA trading at $132.67
• The $134.00 call (ceiling) has a bid price of $5.30
• The $128.00 put (floor) has an ask price of $3.45
• The net premium that will be entered into the BCI Trade Management Calculator (TMC) is $1.85 ($5.30 – $3.45)- see red arrow below

Initial collar time-value calculations with the TMC

• Red circle: This is a 31-dqy trade, if taken through contract expiration
• Yellow cell: The breakeven price point is $130.82
• Brown cells: The 31-day initial time-value return is 1.39%, 16.42% annualized
• Purple cell: There is an additional opportunity of 1% share price appreciation

NVDA Collar Pros & Cons

Advantages

–Protects against catastrophic share loss below the $128.00 protective put strike

–Still results in a net option credit with an insurance policy

–Upside potential remains the same (1%)

–Sleep better at night?

Disadvantage

–Initial time-value return is reduced from 3.99%, 47.04% annualized to 1.39%, 16.42% annualized

Discussion points

• The collar strategy adds a protective put to our covered call trades
• Protects us against overwhelming share price decline
• Time-value returns will be lower than traditional covered call writing in exchange for the added protection
• Our collar trades can be managed by the BCI Trade Management Calculator (TMC)
• We do so, by deducting the put premium debit from the call premium credit
• We can establish both initial and final calculations using this spreadsheet
• The short call is the active management leg of the trade

 

 

 

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This book Is written for investors seeking a low-risk approach to generating cash flow in a user-friendly and time efficient manner. It utilizes covered call writing and then tailors the strategy to achieve the following goals:

• Sell options to lower our cost-basis
• Generate weekly or monthly cash flow with reduced but still significant initial percent returns
• Reduce the database of underlying securities available from 8500 to 11
• Reduce the number of exit strategy considerations from 14 to 4
• Beat the market on a consistent basis
• Reduce portfolio volatility

Click here for more information.

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Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to publish several of these testimonials in our blog articles. We will never use a last name unless given permission:

Alan,

I bought and received your Exit strategies, covered call/puts book. This was the one of the three parts I felt I needed extra help with. It’s an easy to understand and follow book. The roll out, up, down rules have already saved me $$$.

Quasar Market Live interview

 

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