Monitoring Our Collar Trades with the BCI Collar Calculator – November 15, 2021
The collar trade is a covered call writing trade with a protective put. The active leg of the trade is the short call. When exit strategy opportunities present, we make the appropriate trade adjustments. These can be incorporated into our BCI Collar Calculator. This article will highlight a hypothetical trade where the short call is closed and then resold thereby hitting a double.
How is the collar trade structured?
- Buy a stock in 100 share increments
- Sell out-of-the-money (OTM) call options (strikes higher than current market value)
- Buy out-of-the-money put options (strikes lower than current market value)
- The net option position should result in an option credit that meets our stated initial time-value return goal range
Hypothetical trade with BCI
- 8/23/2021: Buy BCI at $83.32
- 8/23/2021: Sell the $84.00 (OTM) call at $3.16
- 8/23/2021: Buy the $77.50 (OTM) put at $1.26
- 9/1/2021: Buy-to-close the $84.00 call at $0.63 (20% guideline) as share price declines
- 9/6/2021: Sell-to-open the $84.00 call at $1.50 (hitting a double) as share price recovers
BCI Collar Calculator results (left column to right column)
Initial trade structuring (left column)
- Initial return is 2.28% with a potential max return of 3.10% if share price moves up to or beyond the $84.00 strike
- Maximum loss is 4.70%
Short call is closed on 9/1/2021: The 20% guideline threshold ($0.63) is reached (middle column)
- The time-value return credit is reduced from 2.28% to 1.52%
- The max gain is decreased from 3.10% to 2.34%
- The max loss is increased from 4.70% to 5.46%
Short call is re-sold (hitting a double) on 9/6/2021 for $1.50 (right column)
- The time-value return credit is increased from 1.52%% to 3.32%
- The max gain is increased from 2.34% to 4.14%
- The max loss is decreased from 5.46% to 3.66%
Discussion
The BCI Collar Calculator can be used to monitor our trade adjustments. Additional adjustments can be accomplished if we sell the protective put although the active leg of the trade is the short call.
Author: Alan Ellman