The Collar Strategy: 2 BCI Spreadsheets: A Real-Life Example with Crocs, Inc. (Nasdaq: CROX) – July 31, 2023
The collar strategy is a covered call writing-like strategy where a protective put is added to the covered call trade, creating a 3-leg trade. BCI has developed 2 calculators that can be utilized with the collar strategy. This article will demonstrate how to use the BCI Collar Calculator and the BCI Trade Management Calculator.
Components of the collar trade
- Buy stock (100 share increments)
- Sell OTM call options (strike higher than current market value)
- Buy OTM put options (strike lower than current market value)
The call strike represents a ceiling on the trade (best case scenario); the put strike is the floor of the trade (worst case scenario).
Hypothetical example of the collar trade
- Buy 100 shares of BCI (long stock position) at $48.00
- Sell the $50.00 OTM call (short call position creating a ceiling on the trade) for $2.00
- Buy the $45.00 OTM put (long put position creating a floor on the trade) for $1.00
- Net option credit is $1.00
Real-life example with CROX ($123.59): 3/1/2023 – 3/31/2023 contract
Call option-chain
Put option-chain
BCI Collar Calculator: initial returns
Note the following:
- The initial return is 1.13%
- The maximum return with upside potential is 2.27%
- The maximum loss with the protective put in place is 2.58%
BCI Trade Management Calculator (TMC): initial returns
Note the following:
- The option premium entered is $1.40 ($6.40 – $5.00)
- The initial return is 1.13% (same as Collar Calculator)
- The max return with upside potential is 2.27% (1.13% + 1.14%)
Advantage of the TMC spreadsheet
The TMC goes much further than the BCI Collar Calculator after these initial calculations. It allows us to manage the active leg of the collar trade, the short call and then calculate post-adjusted final trade and portfolio results.
Discussion
The collar strategy is a covered call writing-like trade which includes a ceiling and floor. BCI has developed 2 spreadsheets for this strategy, 1 specific for the collar (BCI Collar Calculator) and 1 that can be used for most forms of covered call writing and selling cash-secured puts (TMC).
Author: Allan Ellman