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.

 

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[kidgas]

In this post, I would like to discuss the stock collar. I would also like to explain what I like about it, how I am using it, and what the pitfalls might be.

If you have understood the protective put and the covered call, then you understand the stock collar. A collar is simply a long stock position coupled with a protective put and a covered call which pays for part or all of the put. If we go back to the IBM example and use numbers from today's close, we could buy IBM for 102.90. We could then buy the June 100 put for 2.80/share and sell the June 105 call for 2.80/share. This would be considered a zero-cost collar since the premium received for the call offset the cost of the put. Now, what does this mean? It means that if IBM is trading at 80/share on the third Friday of June, we would sell it for 100. Our loss is 2.90/share regardless of what happens to IBM stock. Conversely, if IBM is trading for 140/share on that same Friday, we would only get 105. Thus, our gain is limited to 2.10/share regardless.

Pitfall #1: Limited upside potential. This is the same as with covered calls, but at least the downside is limited as well.

The way that I have been using collars is primarily in my retirement account. I have been using them to limit the downside risk and protect capital and to attempt to generate some income as opposed to investing with the desire to score the next hot stock and big gain. For me, it is a defensive long-term posture that allows me to know that I have protection in place during those times when I can't monitor my account. This is what I really like.

I think my biggest problem with the collar in my retirement account thus far has been my bullish bias in a bear market. Some of the puts were lower strikes and so offered less protection. I also would sell calls on only a portion of my shares leaving some room for upside. Needless to say over the past 8-9 months, there has been no upside. So, I could have done a better job of indentifying the trend and positioning myself accordingly. I don't think it is a problem with the collar, but my management. Despite that, my loss was 18.2% which would be nothing to sneeze at.

Lately, I have been buying puts a little farther out on the calendar and then using the calls to pay for the puts over time. It seems to me that this would be an improvement vs. buying new puts each month. This is what I am referring to when I am trying to chip away at the basis. Each month I am trying to pay down the cost of the put so that over the course of a few months the difference between the overall basis and the current price of the stock is decreasing.

Please feel free to ask any questions. I will provide a little update in a separate post.

 

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[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.

 

[kidgas]

Indeed collars can limit the upside, but they can also protect the downside. I am convinced that the way to make the long term gains is to avoid giving up the big loss.

To answer your question: As the stock, in this case DRYS, has increased in value, my buying power increases, so I use additional margin from a profitable position. Jesse Livermore would only purchase a small portion of his position initially. If it goes up, you are right about the stock and can purchase some more. If it goes down, you end up losing less than if you had bought it all at once. I am using the same theory with the collars since I have no idea which way a stock will go after I purchase it.

An example: I purchase the puts for DRYS at a strike of 80 for $2/share, and purchase the stock at 84. Then I sell the 85 call for $5/share. So my basis is $81. Well as DRYS increases in price over 90/share, I can be fairly confident and purchase additional shares since I have a profit of $4/share from 81 basis to the 85 call.

Furthermore, my goal is to make my money with the credit from the collar, not necessarily appreciation of the stock. Mentally, I am viewing the stock as an asset that I rent out (covered call) and insure (put). If I get some appreciation, great, but my main goal is cash flow.

 

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[kidgas]

Expiration is tomorrow so let's take a few moments to review what might happen:

CELG: half the position should be called at 70 so I picked up some Nov 65 puts for the other half...will sell Nov calls, either 70 or 75, next week. Cumulative basis is 70.4

CTXS: looked like it might not get called out after earnings. At the open, picked up Nov 35 puts for 0.30/share. However, stock bounced back and may get called after all. I don't really like this one. Will let it get called and sell the puts for whatever I can get. Basis is 38.61

DRYS: just holding until Nov...have 100 shares that will be called

GG: no issues. Will have some called at 27.5 and 30. Have positions going into Nov.

HAL, IMCL, PAAS: Nov positions. No adjustments.

VCLK: Have some shares that may end up carrying over to Nov so bought Nov 22.5 puts today. If they get called, I may go ahead and buy back next week and sell the 25 calls.

WDC: Should be called unless market down big time. Will have to watch into the close.

I don't plan on any additional stocks going into November but may add to current positions if there is some movement over the next few weeks. I plan on being able to extract some of the profits after tomorrow. Have $115K of borrowed funds into it, and closing equity today $221K.

Well, Friday was certainly an interesting day, but I survived and equity is back to where it was before the correction. Updating the above:

CELG: Did not get called out since it closed at 69.96. I had to purchase additional Nov 65 puts on Friday. Right now, I am giving it a few days to see if CELG climbs into earnings on Thursday. May sell Nov 70 calls on half the position prior to earnings. Mentioned today on Fastmoney as possible buyout candidate for big pharma.

CTXS: Did not get called out but sold it on Monday at 40.10. Closed out put position. Annualized return 34%.

DRYS: Still holding. Quite volatile last two days. Spent some of the profits on higher strike puts. Now hold Nov 110 and 105 puts with 115 and 125 outstanding calls.

GG, HAL, IMCL, PAAS: No major changes. HAL rebounding somewhat following SLB earnings Friday and its own earnings on Monday. IMCL also mentioned as possible buyout on Fastmoney tonight. Some of GG got called out...shares that had been purchased in mid 20's.

GILD: Forgot to mention above. Had a nice runup so I exchanged 37.5 puts for 42.5 puts at fairly low cost locking in a guaranteed profit on half of my shares...just need to hold til November expiration since I have 42.5 put and 42.5 call. Still have half a position that is open to sell Nov 45 calls. Will give it the rest of the week for higher premium, then take what I can get.

VCLK: Had some shares called out. Was up over 4% on Friday...go figure. That was after purchasing some extra puts earlier in the week since I thought it would hang close to 25. Well now it is working its way back down and I am selling off some of the extra puts since I don't want to add to the position at this time.

WDC: Did not get called but sold on Monday at 25.05. Sold Nov puts to totally close position at an annualized return of 32%.

Also, I calculated the "worst case" scenario tonight...a major opening gap down on all stocks at one time. The good news is that I would not be wiped out. I have occasionally found myself in that position such that I have to increase the number of puts covering certain positions. Right now worst case is a loss of 29%. This is greater than a typical stop loss but not bad, in my opinion, considering the amount of leverage (essentially 11:1).:banana:

 

[kidgas]

Well, the market presented an opportunity to illustrate how I use collars, so here goes:

I first purchased 2000 shares of CELG on 9/11 at 68.70, buying Oct 65 puts and selling the Oct 70 calls. As the stock rose, I picked up another 2000 shares at 72.45, buying the Oct 70 puts and selling Oct 75 calls. CELG went up and down and as October expiration neared, it looked like CELG would end below 70. So, I sold the October 70 puts on Oct 19 for 0.30 and purchased Nov 65 puts to cover 4000 shares. On October 19, CELG closed at 69.96 so I kept all shares.

Then, I sold the Nov 75 calls and Nov 70 calls on Wed prior to earnings release this am (it would have been better to sell the day before but hindsight is 20/20). So, going into earnings I held 4000 shares at an overall basis of 69 with 65 puts and outstanding 70 and 75 calls.

Well, CELG did not please the street and the stock was indicated to open under 65 this am. I watched as CELG fell to 60.20. At that point, I bought Nov 55 puts and planned to buy 2000 more shares and sell the 60 calls in the money so my basis in those shares would be about 58, but optionsxpress wouldn't let the order go through despite it looking like I had enough buying power. Oh well, I was able to finish the rest of the plan which was selling the 65 puts and buying the 60 puts for a 2.50/share credit. That is typically about the best you can do with a $5 difference in strikes. I then bought back the Nov 70 and 75 calls. Now, I have 4000 shares and 60 puts (40 at 60 strike and 20 at 55 strike). My overall basis is 67.11. The plan is to sell the Nov 65 calls at a credit of greater than 2.11, which if called out would generate a slight profit.

I have a GTC limit order at 4. If this happens in the next 3 or 4 days, great! The profit if called is 1.89 on 4000 shares. Not bad for a stock that I purchased at higher prices. Just buy-and-hold, and I lose money. Now, I can salvage something out of the position. If it doesn't happen, I will take what I can get by Wednesday so I can mitigate some of the loss. If I had been able to buy the other 2000 shares, I might have ended up in a better position, but I can't complain. We are driving to Michigan tomorrow to visit family during the day, so I won't be able to even see what is going on in the market. But the order is placed and if CELG hits about 67.5, I would expect the calls to sell for the limit of 4.

Anyway, I just thought I would point out the rationale behind my use of collars...namely protection of as much capital as possible. I also think this illustrates what one can do to salvage a position and even possibly turn a profit on a declining stock. I have done this with STX this past year and with DRYS as it dropped from the 60's to 49 or so and added to my DRYS stake only to have it perform incredibly well.

I would be pleased to answer any questions anyone might have.

 

[kidgas]

One of the big dilemmas that I run across is knowing when to sell. Some people advocate trailing stops. But, that doesn't protect you against a gap down. Selling too early can cost you plenty of gains. I don't know how many shares you have, but one of the techniques that I have been using is to divide my position into parts. I then sell the calls as the stock increases at various levels that I chose in advance.

Let's use your situation to illustrate. You have FDG shares at a basis of 62 and are sitting on 17 points of gain. You could sell now and take that profit. But what if it goes to 100? What if it drops to 50? If it were me, this is what I might look at doing:

I would try to pick up the Sept 75 puts at 7.50 or less tomorrow morning. This would make my basis about 69.5 and guarantee about 5.5 points of profit no matter what happens between now and September. Then, I would wait and see what happens. If FDG hits 85, I would sell the Sept 90 calls on half of my shares. When that happens, you are likely to get about $7/share which would lower your basis from 69.5 to 66. Now you have locked in 8.5 points of profit on a $66 investment. Nice gain. Plus, if FDG closes above 90 in September, you would get 24 points gain on half your shares plus have half your shares left.

If in September, FDG is 50, you still have profit and can get rid of all your shares at 75. Thank God you had those puts. Anyway, that is what I might do. Furthermore, after buying the puts tomorrow, I would not look at it during the day at all. I would put in a GTC order to sell the Sept 90 calls at the price I like and step away. After all, this is a retirement account.

 

[Edge]

Randallg99 - Something else I forgot to mention in my previous post. I'm assuming people play FDG for the dividend. Knowing this, you would have to actively manage your short call if it goes in the money when the dividend is paid. If your short call is in the money, you will be assigned because the holder of the long call will want the dividend. This will leave your positon of shares either flat (so you wouldn't recieve the dividend), or short shares (yikes! the dividend comes out of your account when you are short!).

 

[Edge]

in my mind, the perfect scenario is to sell a covered call for every 100 shares owned, a Jul 85.
With the proceeds, buy 2 calls of a Jun 90 (hypothetically)
these trades cost no money out of pocket.

of course, in my mind again, there is enough time value built into the option price that allows me to capture extra premium that I otherwise would not have had I simply just sold the covered call.

by purchasing other calls, I am hedging against the possibility of having my shares called out by the covered call...

am I close to something realistic?

I don't really think this position will give you what you are looking for. The calls you are purchasing are going to expire worthless long before your short calls. You bought those for a hedge, but they only hedge your position for half the time. I'll graph out the profit/loss chart tonight when I get a chance, it seems like you are giving up a lot of profit potential for next to nothing.

If you are bullish and want to collect premium, have you considered selling an out of the money put spread? You collect premium and are profitable if the stock goes sideways or up.

You could also simply sell near month covered calls. I like selling the near month because the premium erodes at the fastest rate during the last three weeks. I know you like the idea of the extra premium 2+ months out, but you make up for it by selling premium each month, and you have more flexability as far as adjusting since you can sell a different strike each month.

Another bullish trade you might want to consider is a call calendar. I've been meaning to post the type of trades I have been doing with calendar spreads, I have been doing a lot of them lately. The call calendar in your case would be a debit transition initially, but the idea could be to roll month to month for a credit. When you get to the month that your long call is in, you own the long call for free or for a small credit.

One more idea since I read the thread with your current account allocation, it looks like you have a chunk of cash. Have you considered selling naked puts (cash secured)? You could put that extra cash to work by using it as margin to collect premium on a stock you are bullish on. You know the drill here, if it goes down, you essentially got paid to buy the stock at a cheaper price and then you sell a call against it to lower your cost basis again. If it goes up, you keep the initial premium and repeat.

Really my ideas for you are based on what I am assuming you are trying to accomplish with options. Am I correct that you are bullish, want to collect premium, and aren't considered with downside protection?

 

[kidgas]

MJ--
Yes, I concur. I got a premium of 9% to hold for 2 weeks. I already owned some extra puts and wanted to purchase extra shares to go along with those, knowing that I would likely be selling some shares at 35 in 2 weeks. Interesting in that GG got caught in the downdraft on Monday with the rest of the stock market but today seemed to follow the gold price somewhat. You just never can predict what will occur. Better to react. I plan on picking up some November GG puts in the next two weeks and selling some calls on any major spike north of 27.5. Will see if it gets there.

DRYS sure is taking it in the shorts. The nice thing is that when the puts are exercised, I will have some cash available to begin to nibble back in as I wait for the bottom, increasing my positions as the turn takes hold. May have to wait a year or two or three or ....

 

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[kidgas]

I've noticed a lot of new members recently, so I thought that I would place a little tutorial at this point in the thread since I know it takes quite a bit of time to read back through multiple posts and glean the important tidbits.

Before one can understand stock collars, one must understand some basics regarding options. An option is a contract between two parties. One party agrees to sell something for a set price (called the strike price) between now and some date in the future (expiration date). Options are derivatives which mean that they derive their value from the ability to conduct a known transaction. That value is known as premium. Option contracts can exist for real estate, stocks, currencies, commodities. I could even write an option contract on my baseball cards if someone would buy it. I choose to work with options for individual stocks (currently GG, EMC, DRYS, PCU, etc)

Now there are two types of option contracts: calls and puts. A call gives the holder of the call the right (but not the obligation) to call up the holder of the underlying stock and buy it at the strike price anytime before expiration (which is American style--European style can only exercise on expiration day). A put gives the holder of the put the right (but not the obligation) to put (or I like to think of it as stick it to) the stock to the writer of that contract anytime prior to expiration. An option contract is typically written for 100 shares of stock and will only be modified for things like stock splits, special dividends, etc.

Now the writer of the call or put contract is obligated to live up to his/her end of the bargain. You can think of puts as insurance policies for stocks. If I buy fire insurance and my house burns down, the insurance is obligated to replace it according to the terms of the contract. They write the contract to collect and keep the premiums, taking the calculated risk that a recurrence of the San Francisco fire won't happen. The same is true with options. The writer of the calls and puts gets to keep the premium whether or not the contract is ever enforced. The writer has to evaluate the risks and determine whether or not it makes economical sense to enter into such an agreement.

There are a few other terms that you should know: at-the-money (ATM), in-the-money (ITM) and out-of-the-money (OTM). When speaking about "the money", the comparison is between the market price of the underlying and the strike price. For example, if IBM is trading at $100/share then the 100 strike price is ATM. This is true for both calls and puts. Now for the 95 call, that option contract is $5 ITM which means that the holder of the contract can call IBM at 95 and sell at 100 in the open stock market. By contrast, the 95 put is OTM. Why would I put the stock to someone for 95, when I can sell in the open market at 100? So, if a strike price for a call is ITM, the put at the same strike is OTM and vice versa.

Finally, let's talk about the components of value of the option contract. The contract only has value if it is ITM or has time remaining prior to expiration. If the contract is expired, it has NO value. It is an invalid contract. Going back to the IBM 95 call. Say it expires in May. Stock option contracts expire on the third Saturday of every month but since the option market isn't open past 4 pm Friday, the third Friday of the month becomes the effective expiration time. So, the May expiration is two weeks from today. So, the IBM May 95 call may have about $1/share in time value. Over the next two weeks, IBM can move up or down which will impact that $5 ITM or intrinsic value. As time passes, the time value will decrease (more on this in later posts) and the intrinsic value will fluctuate based on the trading in IBM stock. If IBM increases to 106, then the intrinsic value of the 95 call becomes $11 per share.

Next time, I will discuss covered calls and protective puts.

 

[kidgas]

So, now I discuss protective puts and will follow up with a discussion on covered calls.

A protective put is just as it sounds. It is a put option that you own to protect stock that you own. It is like an insurance policy. If I own 1000 shares of IBM stock, and I am worried about an upcoming earnings announcement, I could by 10 put contracts (100 shares per contract = 1000 shares) to protect my IBM stock against a sudden and severe downturn related to the earnings announcement.

This is opposed to just buying puts for the sake of speculation that a stock might decline like you would when you short a stock.

Now why not use a stop-loss order? I will tell you why I don't like a stop-loss order mental or otherwise. Say IBM is trading at 100 with earnings coming up. I purchase my 95 put contracts and Joe enters a stop-loss order at 95. After the market closes, earnings are just terrible and revenue is down 25%, there is a class action suit announced, and the CEO is killed in a plane crash during the conference call. The next day IBM opens at 60. Guess what? I will get 95/share when I exercise my puts. Joe will get 60 when the market opens. A stop-loss will not protect you from a gap down. Since most major stock moving events (either up or down) occur after hours or pre-open, a stop-loss isn't going to protect you. Yes, it will protect you from a steady decline but so would a put. That is why I prefer protective puts.

Now on to covered calls. Several stock market "gurus" will advocate covered calls as a way to make additional income on stocks that you are holding or purchase for that purpose. Remember that a call gives the buyer the right to call the stock away for the strike price. The seller of the call is obligated to fulfill the terms of the contract. If I write a contract (meaning I am the seller), I am obligated to perform. If I own the shares about which the option contract refers, then I am already covered if the shares get called. Hence, I have written a covered call.

For example, I own the 1000 shares of IBM stock. From today's close, IBM closed at 106.19. I could sell 10 contracts of the June 110 IBM call for $2.45/share. That means I would get $2450 - commissions in my brokerage account and would keep that money regardless of what happens to IBM stock between now and the third Friday of June. That is the way that you can earn extra income from stock that you already hold or purchase for writing calls. Do this 5 or 6 times per year and the money can add up.

But, there is a downside to managing and writing a covered call portfolio (and I have personally experienced this). You are essentially doing exactly the opposite of what you should be doing to make a profit in the market. You are keeping your losing stocks (letting your losers run) and letting the winning stocks get called away (cutting short your profits). So you end up with a portfolio full of losers. If IBM goes to 150, I am stuck selling it at 110 with only a profit of only 6.26/share (2.45 for the call premium and 110-106.19). But, if IBM drops to 90, I only tempered my loss by 2.45/share. Big deal. I probably should have sold sooner, but I would have had to buy back the call and then sell the stock. That is why I don't like covered calls.

Next time, I will talk about the stock collar which is essentially the protective put and the covered call combined. I will explain what I like about it, what the pitfalls can be, and how I am using it.

 

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[kidgas]

Thanks, MJ.

Again, it has been quite some time since I updated the collar results. I am still trading them, rolling up calls, rolling down calls, buying new puts, etc. I thought I would provide a quick update while I am taking a break from some other things.

Retirement Accounts--

GG: Have done adjusting since last fall, buying low and selling higher. This is the only stock in this particular account and has been so for awhile. It also does not get any deposits so it is easy to follow returns on the strategy. Current basis is 29.10 which is not too different from last September. I have outstanding June 45 calls and a few May 43 calls that I will likely have to roll. I sold 100 shares today at 46.05 and will keep selling on the way up. I don't want to repeat mistakes of the past when it was in the 50's and I didn't sell or buy puts. Current puts are May 36. Will have to decide what to do with June puts in the next 2 weeks. This account is up 19% in 2008, 18% in 2009, and so far in 2010 about 5%. Looking to keep consistent at about 12% gains overall year to year using collars.

ONXX: Screwed this one up royally. It's my own fault, I know what I did and won't be making the same mistake. Basis is currently 34.23. Have some work to do to get this one back in shape.

EMC: Basis is now 18.56 so I have repaired this one with the current price at 18.79 above the basis. I will continue to chop away at the basis. Considering the first shares were purchased at 25.33, not too shabby with the market of 2008 thrown in.

DRYS: Still chipping away seeing what I can accomplish. Not the smartest plan, but I think the information will be helpful in the long run. Basis is 15.72. I plan on knocking this down another dollar or two by the end of the year. Will see what happens.

Got out of FAS with annualized profit of 8.1% and PCU with annualized 56%. Added SLW and AKAM.

SLW: Basis is 16.62 with calls at 17. Got whip-sawed a few months back and had to work. Will either let it get called for small profit or roll up into an ITM call since I am concerned that it will give up gains and can fall rather quickly.

AKAM: Basis is 33.3 with calls at 33 and 39 for May. Will likely roll and purchase puts such that I can lock in a profit since this one has been strong lately. The 39's should roll with a credit. I will have to ante up for the 33's and roll into an ITM call giving myself some cushion in case of a market retreat.

The bottom line for these retirement accounts is that I took profit in two positions since September, have a solid handle with GG, am profitable on EMC, AKAM, SLW, and have lots of work with ONXX and DRYS.

Despite the work to do and the mistakes I have made, I am pleased. These accounts only lost 18% during the market melt down. I was down a little last year also (mainly due to ONXX and DRYS) but am still ahead of the S&P 500 since January of 2007 when I started trading collars.

I suspect that the results will improve over time especially as I get more familiar with how they react under certain market conditions and as I focus more on extracting cash from the calls. I believe that extracting cash is an important component that I have given short shrift to over the past few years. I will start given that aspect more attention and tracking it on a monthly basis to see what the impact might be. I believe it will be positive.

That is all I have for now. Will continue to update periodically.

 

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[MJ DeMarco]

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

 

[kidgas]

Well, it was a busy day in the market yesterday, and the futures don't look that good this am. In keeping with my plan, here is what happened yesterday. I purchased 25% more shares of DRYS with my investment aliquot yesterday after I had purchased the Sept 45 puts at 3.20. Got into DRYS at 49. Then toward the end of the day rally, I sold the Sept 50 calls on that aliquot at 6.5 giving a basis of 45.7. So, only 0.70/share at risk with potential reward of 4.30/share before commissions.

As to the original shares, I exchanged the Sept 55 put for Sept 50 to generate a credit of 3/share. That brought the basis from 62.9 to 59.9 for those shares. So, I can sell the Sept 60 call for any price and that determines my profit.

There are 2 issues going forward. First, it is a potentially crappy market and DRYS could easily decline significantly. However, my overall basis for the entire position is 52.07. My risk is between 50 and 45 (about 47) or about 10% overall. This is not much different than having a stop in place. Second, DRYS reports earnings on Tuesday after the bell. Obviously, that could create some volatility. Downside risk is stated above. I may even buy some additional puts over and above the position to mitigate some of that risk. For upside potential, I have about 40% of the position uncommitted to the calls.

It should be an interesting few days.:icon_fU:

 

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[kidgas]

Most recent update:

Well, as it turns out, I am unable to get portfolio margin at optionsxpress since the account is too recent. They said they want 3-6 months of trading activity in that account so I will try again in October (despite the fact that I sent in info from the past 3 years). They also said that DRYS was a little too volatile and would want about 10% more equity. I don't think that will be a problem. Currently, there is $105,000 equity. By October, I plan that the profits will be sufficient.

As to DRYS positions: I was a little concerned going into earnings so I bought 5 extra Sept 50 puts to protect against a major decline. I also on Monday purchased an additional 8 Sept 50 puts at 3.4 to protect the 800 shares I bought that day at 54.44. Then, yesterday, I sold 8 Sept 55 calls at 5.20 to give a basis of 52.64 for those 800 shares. With that, however, I have used up most all of my margin purchasing power. I still have 800 shares free to run.

Summarizing:
1000 shares with basis of 45.7 to sell at 50. Protected by 45 puts.
800 shares with basis of 52.64 to sell at 55. Protected by 50 puts.
800 shares with basis of 62.89 with no obligation. Protected by 55 puts.
5 extra 50 puts. I will either sell these or try to purchase a few hundred shares if I sell calls on the last 800 uncommitted shares.

Now there is just watching and waiting til Sept 21st.

 

[kidgas]

On 8/22, I ended up selling 5 Sept 60 calls at 5.50. That leaves 300 shares free from calls and enough purchasing power to pick up 200 more shares. For now I am just waiting to see what happens next week.

 

[kidgas]

Also, I thought I would share a link to an article that convinced me to use collars for my portfolio. My biggest concern was protection of capital since I feel that not taking the big loss is more important than hitting a home run.

http://www.optionetics.com/articles/article.asp?id=8322

 

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[kidgas]

Well, as luck would have it, I was approved for portfolio margin yesterday. So, I promptly picked up another 900 shares of DRYS yesterday. It is getting somewhat complicated to continue to relate everything that is happening. Suffice it to say that my goal for the portfolio using collars is $1/share profit each and every month.

I am seeking to accomplish this goal by legging into my positions and protecting every block of stock that I purchase with puts. Then I either sell the call right away or let it run for a few days to see if I can capture more upside. The position in DRYS was started on August 10. I plan on picking up some more shares tomorrow and then probably some next week using options from September. After that, I will move on to October options and just keep recycling.

 

[kidgas]

I did some calculating over the holiday weekend and decided that my capital is too exposed for my comfort. I calculated a "worst case" scenario of an opening gap in DRYS to 40 and found the potential for significant loss. Therefore, tomorrow my task will be to purchase 20 Sept 60 puts. This will protect virtually all of my original capital for a relatively small price.

Currently, I have 5600 shares of DRYS, of which 3600 are committed via the selling of calls. I have 56 put contracts but at strikes which are too low for my comfort. I can take care of this tomorrow and will continue to purchase additional shares this week.

I also am considering purchasing NVDA shares since I feel the stock is in an upward trend, but I have not fully committed to this yet.

 

[kidgas]

Well, I still haven't bought any NVDA yet. I did, however, manage to purchase additional puts at the Sept 60 and 65 strikes. Plus, I still have puts at 50 and 45 as well. I also purchased additional shares of DRYS and sold some more calls.

What I have found interesting is that with the portfolio margin, my buying power has held virtually constant as I purchase puts, buy shares, and then sell calls on the way up. This has allowed me to keep purchasing shares but does seem to add some risk because of the margin.

More interesting, however, is that because I have more puts than shares, even if DRYS were now to fall to 40, I would still be profitable. In fact, that profit would be about the same as if it stays in the 70's.

To summarize my current positions:
DRYS 7000 shares
Sept 50 calls 10 contracts
Sept 55 calls 8 contracts
Sept 60 calls 5 contracts
Sept 70 calls 13 contracts
Sept 75 calls 24 contracts
Sept 45 puts 5 contracts
Sept 50 puts 21 contracts
Sept 60 puts 36 contracts
Sept 65 puts 34 contracts

I won't have access to the market tomorrow. On Friday, I may buy some more. If not, next week will start looking at the October puts and calls since that is within 2 weeks of expiration and that is what my plan states.

 

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[kidgas]

Bought 3000 more shares of DRYS today protected by 30 Sept 70 puts. Sold 20 Sept 75 calls leaving 2000 shares free of calls. Still just watching NVDA--am not committed to it yet.

Next week I will begin looking at October puts and calls. The plan will be to slow down a little since I was fairly aggressive this week. I did like how DRYS held up in a down market today.

 

[ProInvestor]

Check out Van Tharp's - "trade your way to financial freedom" for protection strategy.
I will add some text from the book a bit latter on...

Rgds.
proinvestor

 

[kidgas]

I have read through the first 3 chapters so far. I plan to read some more this weekend. I am looking forward to learning about position sizing.

Please feel free to post some info plus your interpretation, thoughts, and experience. I am always looking to learn more. Thanks.

 

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[kidgas]

Got through chapter 5 today. Plan to read some more tomorrow. Also, I calculated a "worst case scenario" on my portfolio. For me, a worst case would be DRYS gapping down to 40, so I base calculations on that type of disaster. With the current puts providing protection, I actually have a profit "locked-in" and just have to wait until Sept 21 to see what that profit will be.

 

[RAiMA]

Check out Van Tharp's - "trade your way to financial freedom" for protection strategy.
I will add some text from the book a bit latter on...

Rgds.
proinvestor

Currently reading this atm. I bought the book back in 1999 and read the first 5 chapters then. For some reason I didn't take in ANY information then and what I'm reading through this 2nd time round is making so much more sense. Can't wait to finish the book

I have read through the first 3 chapters so far. I plan to read some more this weekend. I am looking forward to learning about position sizing.

Same, I'm looking forward to that too. What have you learnt so far?

 

[kidgas]

RAiMA,
I have not been ignoring your question, just very busy. I am almost through the 7th chapter. After I get through that, I will post a book review thread on those chapters, hopefully this weekend.

Now, as to the stock collars. I will give another full update this weekend as well. Today, my concern is that DRYS might continue to drop. I don't know what it will do but I want to be prepared no matter what might happen. I have 3000 uncommitted shares (no covered call) that I know will carry over to the October expiration. Earlier this week when DRYS was in the 77-78 range, I picked up 10 Oct 70 puts. The plan was to pick up more as DRYS climbed but that didn't happen. I suppose it might rebound, however, I need to have some more puts by next Friday at the close. Also, I have 4400 shares that have outstanding Sept 75 calls that might need to be protected. So, today I will need to buy more Oct 70 puts.

 

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[kidgas]

I made some put purchases going into October to protect equity in the event of a continued decline of DRYS. I also hold some CELG and GG in the same account but DRYS is the major position and the one I am using to illustrate and condense my thoughts. Starting equity on 8/10 was 105,000. Current equity is 111,250. DRYS positions are as follows:

DRYS shares: 11000
Oct 70 puts 110
Sept 70 puts 30 -- will try to sell this week sometime for some value
Sept 50 puts 8 -- these will expire worthless barring some calamity
Sept 45 puts 5 -- same here
Sept 60 calls 5 -- will let these get called out
Sept 70 calls 13 -- same if DRYS closes above 70 on Friday 9/21
Sept 75 calls 44 -- may expire worthless unless rally this week
Oct 55 calls 10 -- rolled out at cost of 3.80/share for 5/share in equity
Oct 60 calls 8 -- rolled out at cost of 2.80/share for 5/share in equity

I stand to gain more if DRYS rises but should be reasonably protected if DRYS continues to fall. If it does fall I will keep adding October 70 puts to profit to the downside and maintain purchasing power to add more shares at lower prices. That is the plan, anyway.

 

[kidgas]

I've been very busy in the last week so I haven't been able to update much nor check this site. However, I do have a few minutes tonight and will give a brief update of my activities.

I have begun to diversify the portfolio somewhat, although I am still heavily invested in DRYS. I did add some more equity since as DRYS began to decline, the portfolio equity came close to the 100,000 threshhold for portfolio margin. This was before the fed decrease and the recent rally. I took that opportunity to diversify and have made some modifications to my strategy that I believe will pay off in the long run.

Currently, the portfolio holds:
CELG protected with Oct 65 put and Oct 70 call sold
CTXS protected with Oct 35 put and outstanding Oct 40 call
DRYS protected with Oct 70, 75, 80 puts and outstanding 75, 80, 85, and 90 calls
GG protected with Oct 22.5, 27.5 puts and outstanding 27.5 and 30 calls
VCLK protected with Oct 22.5 puts...I have not sold any calls yet as I am giving this several days to see if it will keep rising. I do not want to stay exposed for too long though as this is one of the risks. I almost got burned by this as DRYS was falling watching the equity decline. I have some more leeway now.
WDC protected with Oct 22.5 puts and outstanding Oct 25 calls.

The underlying theme for this portfolio is monthly income generation from the sale of collars with protection of capital followed by appreciation.

 

[kidgas]

Briefly, did look at the risk of the portfolio on Friday. Because of the high level of leverage, I did run the risk of ruin if all 6 stocks had an opening gap down of 30% or greater. Obviously, the odds are remote but I wanted to protect myself and sleep well. So, I took the most highly levered stock, DRYS, and purchased 100 Oct 70 puts. With this, I gave up 3600 of future profits (thru Oct 19) but would still be in the game if a disaster happened.

The ultimate plan is to double my capital, then pull out the profits and play with only house money (ala Livermore). I fully anticipate a double by February (ie 6 months) since I am on pace to be up about 40% from Aug 10 to Oct 19. From Aug 10 til now am up 23%.

 

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