Collar Strategy Using Weekly Calls and Monthly Puts: A Real-Life Example with (LABU) – January 03, 2022
The collar strategy is a covered call writing-like strategy where protective puts are added to our covered call trades. This creates a ceiling (the short call) and a floor (the long put). Typically, the expiration dates of the calls and puts are the same. We must also ensure that the call credit and put debit result in a net credit scenario. On 8/26/2021, Saafi wrote to me with a proposed collar trade where a Weekly call option and a Monthly put option were used. This article will analyze this real-life trade with Direxion Daily S&P Biotech Bull 3X Shares (NYSE: LABU). This is a leveraged ETF.
Saafi’s proposed collar trade
- 8/27/2021: Buy 100 x LABU at $60.50
- 8/27/2021: STO 1 x 9/3/2021 $63.60 call at $1.85 (ceiling)
- 8/27/2021: BTO 1 x 9/17/2021 $59.00 put at $4.85 (floor)
- The trade incorporates a 1-week call and a 3-week put
Conversion to a 1-week trade
We all (okay most) remember high school algebra where we convert fractions to a common denominator. In this case, let’s simplify the trade analysis by breaking up the 3-week put premium into 3 weekly premiums of $1.62 ($4.85/3).
Calculations using the BCI Collar Calculator
- The red arrows show an initial 1-week time-value return of 0f 0.38%, 19.82% annualized
- The green arrows show a maximum 1-week return (with upside potential) of 5.34%, 278.38% annualized
- The blue arrows show a maximum 1-week loss (to the put strike) of 2.10%, 109.46% annualized
Discussion
To appropriately analyze a collar trade with a longer-term protective put, we must convert the put premium to a similar time frame as the short call. These stats are then entered into the BCI Collar Calculator to ensure the return meet our initial time-value return goal range which will differ from investor-to-investor.
Saafi’s trade incorporated a leveraged ETF which creates a good-news-bad-news high volatility and high premium trade. Using a protective put will mitigate potential losses to the downside. Generally speaking, leveraged ETFs are not appropriate for most retail investors.