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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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A look at prices today show that with shares trading $199, the call is $0.03 and the put is worth $11.30. This means that the $12 decline in the stock has been offset by the decline in the call value and the increase in the put value.

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.

Twitter: @steve13smith

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No positions in stocks mentioned.

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