ஞாயிறு, 24 அக்டோபர், 2021

Should We Short a Put to Help Fund a Collar Trade?

1. Covered call trade + protective put.

2. Collar trade has 3 legs

  • -Long STOCK (buy)
  • -Short call (sell)
  • - Long Put (buy)

3. Should we add a 4th leg by selling PUT as well?

-To fund the protective put.

All traded on 10/9/2018

  • Buy 100 NVDA at 264.24 (now a long stock position)
  • Sell 1x 265 call at 14.45 (now a covered trade)
  • Buy 1x 250 Put at 8.20 (now a collar trade)
  • Sell 1x 245 put for 6.65 (covered call on the upside and bear put spread on the bottom side)




Adding a Short Put to fund the cost of the Long Put: Advantages

  • By generating a premium of $6.65, $8.20 cost of the protective put is reduced to $1.55
  • The initial calculations then became:                                                                                 -14.45 - 1.555 = $12.90 = 4.9% ( on a cost basis of $264.24)
  • This is more than double the collar initial time value return

Adding a Short Put to fund the cost of the Long Put: Disadvantages

  • By selling the deeper OTM put (245.00 strike) we are  incurring additional risk to the downside. 
  • If the price moves below 245.00 strike, we start losing money on that leg of the trade as the strike now is in ITM and has an intrinsic value component.
  • That risk can be quantified in a worst case scenario a follows:-            
  • 245-6.65 = 238.35 per share
  • Of course we would take exit strategy steps before letting the trade get that far out of control, but the risk should be understood and qualified before entering the trade.

  • Discussion
  • When establishing our covered call positions ,  we must define3 our personal risk-tolerance and set up our trades accordingly.. 
  • If we require additional protection to the downsize, a protective put is a reasonable approach.
  • Like most insurance policies, we must pay for this protection and our initial results will then decline.
  • If a short put added to mitigate the cost of Long put, we 2ill then be adding additional risk which is what we were trying to avoid by buying the protective put.
 * https://www.youtube.com/watch?v=TcF12X4uljg&t=435s 

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