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Three Stocks You Should Collar Today

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Avoid earnings blips and dips with the long stock-long put-short call technique.

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MINYANVILLE ORIGINAL For some active traders, earnings season represents more of a casino, with the possibility of immediate jackpots off of the large stock price moves that often immediately follow a report. But for the majority of investors, these knee-jerk spikes are viewed as potential minefields they would just as soon avoid.

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.

Price Freeze

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.
The sale of call would give you the obligation to sell shares at the $210 strike price; the purchase of the put gives you the right to sell shares at $210 any time prior to this Friday's expiration. So given the position was established for an $0.80 credit, you have basically locked in a sale price at $210.80 per share between now and this Friday's expiration.
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No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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