Lecture no 53 collar
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The document discusses the collar trading strategy, which combines buying a stock, purchasing put options for protection against declines, and selling call options to finance the insurance. This low-risk strategy is suitable for conservatively bullish outlooks, aiming for long-term positions with limited maximum risk and reward. Successful execution involves careful selection of strike prices and managing the position according to pre-defined trading rules.
![Context - Collar
Effect of Time Decay
Time decay will be helpful with the sold call; it will be unhelpful to
the bought put and will have no effect on the stock you have
bought.
The net effect is that time decay is helpful here when the position
is profitable and harmful when the position is loss-making.
Time Period to Trade
You will be safer to choose a Longer time to expiration
Breakeven = [Stock price - call premium + put premium]](https://image.slidesharecdn.com/lectureno53-collar-200710023245/85/Lecture-no-53-collar-8-320.jpg)
Lecture no 53 collar
- 1. Lecture No 53 Collar Rohan Sharma (Coach)
- 2. Basics Concepts – Collar Proficiency - Intermediate Direction – Bullish Asset Leg – Long Stock + Long Put+ Short Call Max Risk - Limited Max Reward - Limited Capital Gain Strategies
- 3. Description – Collar The Collar is similar to a Covered Call but typically works over a much longer time period and involves another leg—buying a put to insure against the stock falling. The effect is of buying a stock, insuring against a down- move by buying puts, and then insuring the trade by selling calls. Buy stock ➞ Buy asset Buy puts ➞ Insure it from falling Sell calls ➞ Finance the insurance
- 4. Description – Collar Buy the stock. Buy ATM (or OTM) puts. Sell OTM calls. The closer the put strike is to the price you bought the stock for, the better insurance you’ll have if the stock falls. However, the better insurance you have in that regard, the more it will cost you!
- 5. Steps to Trading a Collar Steps In Try to ensure that the trend is upward and identify a clear area of Support. Steps Out Manage your position according to the rules defined in your Trading Plan. At expiration, you hope that your call will be exercised and that you’ve made your maximum profit. If the stock remains below the call strike but above your stop loss, let the call expire worthless and keep the entire premium. The point of a Collar is that you set the put strike at or above your stop loss, creating a minimum risk trade. Therefore, you are at liberty to keep the position until expiration.
- 6. Context - Collar Outlook With Collars, your outlook is conservatively bullish. This is supposed to be a very low-risk strategy. Rationale To execute a long-term trade that is inherently low-risk. You will have to use online tools to determine how little risk you’re going to take. Long-term trade that takes money out of your account, there is “opportunity cost.”
- 7. Context - PutRatio Backspread Net Position This is a net debit trade because money will come out of your account to pay for the stock. If you select the right strike prices for the bought put and sold call, you may even be able to execute this trade with no risk at expiration, even though money has been debited from your account in order to make the trade. If the stock falls, then the ATM put (your insurance) will rise in value, and you will retain the premium received by having sold the OTM call. This combination will offset the fall in value of the long stock.
- 8. Context - Collar Effect of Time Decay Time decay will be helpful with the sold call; it will be unhelpful to the bought put and will have no effect on the stock you have bought. The net effect is that time decay is helpful here when the position is profitable and harmful when the position is loss-making. Time Period to Trade You will be safer to choose a Longer time to expiration Breakeven = [Stock price - call premium + put premium]
- 9. Exiting the Trade - Collar Exiting the Position If executed correctly, you will not need to exit this trade early because there should be very little risk. Advanced traders may leg up and down as the underlying asset fluctuates up and down. In this way the trader will be taking smaller incremental profits before the expiration of the trade. Mitigating a Loss This shouldn’t be an issue with the Collar!
- 10. Advantages and Disadvantages Advantages Give yourself maximum protection against a fall in the underlying stock price. With volatile stocks, you can create a very low risk or even risk-free trade. You can create a high yield on risk. Disadvantages Works best for long-term strategies (over one year), so it is slow. Maximum upside only occurs at expiration. Creates only a low reward on capital expended.
- 11. Real Time Example Rohan Sharma (Coach)
- 12. Price Movement Position on Charts Rohan Sharma (Coach)
- 13. Breakout A B C
- 14. Example – Covered Call Market Behavior Nifty Option /Future Future Buy & OTM CALL Sell Action (Long/ Short) Long Future & Short Call Price Movement Expectation Upside Spot Price 11700 Future Price (Long) 11700 Strike Price (LONG ATM PUT) 11700 Premium 110 Strike Price (SHORT OTM CALL) 11800 Premium 70 Break Even (Future Price - Call + Put ) = 11700 – 110 + 70 = 11660 Time to Expiry Mid/Last of the Month Position of Price in Charts At Absolute Bottom / Higher Bottom in Up Trend (A-C) (B-C) Max Risk Limited Max Reward Reward Limited
- 15. Covered Call Future Price (LONG) 11700 Strike Price (LONG ATM PUT) 11700 Premium 110 BEP 11590 Strike Price (SHORT OTM CALL) 11800 Premium 70 BEP 11870 Nifty at Expiry Future (LONG) ATM Put – LONG BEP - 11590 OTM CALL – SHORT BEP - 11870 Total P&L 12200 500 -110 -330 60 12000 300 -110 -130 60 11900 200 -110 -30 60 11800 100 -110 70 60 11700 - -110 70 -40 11600 -100 -10 70 -40 11500 -200 90 70 -40 11400 -300 190 70 -40 11200 500 390 70 -40