Stock Collars

[kidgas]

I am going to attempt to create a thread to share my experience trading stock collars in this forum since the group here seems more willing to learn compared to the RDPD forum. I will update as I make changes in my positions in a corporate account.

On Friday, I initiated a position in DRYS. I purchased the Sept 55 puts first at 5. Then, I purchased DRYS at 57.89. The plan will be to wait for about one week and see what develops with the stock, possibly selling the Sept 60 calls to create a collar when the stock has run up. I also plan to ease into the stock over the next several weeks.

I took the total amount of my purchasing power and divided by 12. I plan to allocate an equal amount into positions over the next 12 weeks essentially purchasing a full position over a quarters time.

The reasoning is that over that time the stock may increase, decrease, or remain virtually unchanged. If decreasing, I can purchase more shares. If increasing, my initial purchases are becoming increasingly profitable. If unchanged, I need to start selling some calls to pay for the puts but can still make money while waiting for some movement. I look to make the next purchase on Thur or Fri of the upcoming week.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MJ DeMarco]

Awesome, I'm looking forward to seeing your results of the strategy. Any particular reason for the stock?

 

[kidgas]

DRYS is a highly volatile stock which will work better with selling covered calls as part of the collar. The higher volatility will make for higher premiums on the calls. It also means the puts cost more but people tend to be more optimistic and the natural bias of the market is up over time meaning the calls should pay for the puts creating a zero cost collar. The volatility will allow for more opportunity to make adjustments over the next month.

For example, on several stocks I have been able to lock in a guaranteed profit. If DRYS were to increase to about 62, I could buy the 60 puts for about 4/share, sell the 55 puts for about 2/share and sell the 60 calls for about 7.00/share. My basis in the overall position would be 57.90 (stock) + 5 (55 puts) + 4 (60 puts) - 2 (sell 55 puts) - 7 (60 calls) for a total of 58/share plus some commissions. This creates a conversion (put and call at same strike) that locks in profits. Then, all I have to do is hold til expiration. Usually, I end up closing out the position early by buying back the call, and selling out the stock and puts when I want to move on to something else. The key is the volatility.