Three Stocks You Should Collar Today
Avoid earnings blips and dips with the long stock-long put-short call technique.
You could now decide if you want to let options be exercised at tomorrow’s expiration and close out your IBM position at an effective sale price of $210.80. But more likely you would want to just close out the option collar and maintain your long, dividend collecting, share position, none the worse for wear.
Of course, it also important to note that had shares of IBM rallied 5%, those gains would have been forgone. But again, the collar could simply be removed and the long stock position would be maintained as if nothing happened.
Now let’s take a quick look at some potential collars in the names mentioned above. With Google trading around $750, one can sell the $755 calls that expire next Friday, October 26 at $17 and buy the $745 puts for $17 per contract. This means that this is established for even money. Note that in this case, I’m using different strikes for the puts and calls which both are slightly out-of the-money . This is simply to illustrate how you can address strikes to give a bullish or bearish tilt. In this case, you are locking in a sale price of either $755 on the upside or $745 on the downside. So you are risking $5 to possibly make $5 should Google move above $755 following the earnings report. Using next week’s expiration gives you several days following the report to assess your position.
Likewise, with Apple due to report next Thursday, one may look at the options that will expire the following week on November 2 (they will be listed that prior Thursday, October 25) or even go out to the November series.
Collars are a great solution to help steady your portfolio during the jittery earnings season and let you make a rational and patient analysis of the earnings data.
For more from Steve Smith, take a FREE 14-day trial to OptionSmith and get his specific options trades emailed to you along with exclusive access to his full portfolio. Learn more.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
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.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.