Three Stocks You Should Collar Today
Avoid earnings blips and dips with the long stock-long put-short call technique.
The quarter-to-quarter focus and large single-day price moves can be major obstacles, both financially and mentally, to maintaining a rational long-term approach to investing. Instead of taking time to really assess the company’s results, a sharp decline could trigger an emotional response that causes one to dump shares on what might only be a knee-jerk overreaction.
Think of IBM’s (NYSE:IBM) $11 or 6% decline following its earnings report yesterday. Two months from now, shares under $200 might look like a bargain. But for someone already long the stock, adding to the position yesterday, today, or even tomorrow not only takes fortitude and conviction but also takes the financial wherewithal.
How nice it would be if you could essentially put your position on hold, make a patient and thoughtful analysis of the earnings report, and then step into the fray with a clear head. By using an option collar, one can do just that.
A collar is a position consisting of long stock, long put, and short the call. The sale of the call helps finance the cost of the put, meaning that this is a low or even no-cost position. The strategy is typically used to lock in a minimum sale price on an existing long stock holding. This can help you ride out the short-term blips and dips that earnings can generate.
With popular names such as Google (NASDAQ:GOOG) reporting this afternoon, McDonald’s (NYSE:MCD) reporting tomorrow, and Apple (NASDAQ:AAPL) reporting next Thursday, using a collar to put these positions on hold for a few days around earnings could keep you from getting rattled out of what should be long-term core holdings. [Editor's note: After this article was published, Google's filed its 8-k financial statement early and showed a large miss on profit targets. The stock plunged $68.19/share, or 9.03%, and trading was halted.]
Let’s look at how a collar in IBM might have worked. On Tuesday, with IBM trading at $211, one could have set up a collar as follows:
- Bought an October $210 put for $2.70 per contract.
- Sold an October $210 call for $3.50 per contract.
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