Calendar Collar

[Hopeful]

Has anyone else read this:

http://tsueiconsultants.com/

Tsuei describes the Calendar Collar Trade (CCT). From what I understand the CCT is like an ordinary collar except that you buy the near-month put and sell the next month's call to pay for that put. I'm wonderin' if it could work.

The problem I have with it is that it would seem counter-intuitive to buy the more quickly eroding front-month option and sell the slower decaying call. If the stock doesn't move much then you will end up holding a worthless put but still be obligated to the buyer of your short call - ie the transition of both put and call to the next month out will cut you up like a whipsaw.

I'd appreciate your comments; take a quick look through the poorly-written (it's free so can't complain) PDF and throw you thoughts up on here. Cheers.

 

[wayneL]

Has anyone else read this:

http://tsueiconsultants.com/

Tsuei describes the Calendar Collar Trade (CCT). From what I understand the CCT is like an ordinary collar except that you buy the near-month put and sell the next month's call to pay for that put. I'm wonderin' if it could work.

The problem I have with it is that it would seem counter-intuitive to buy the more quickly eroding front-month option and sell the slower decaying call. If the stock doesn't move much then you will end up holding a worthless put but still be obligated to the buyer of your short call - ie the transition of both put and call to the next month out will cut you up like a whipsaw.

I'd appreciate your comments; take a quick look through the poorly-written (it's free so can't complain) PDF and throw you thoughts up on here. Cheers.

The payoff diagram is pretty self explanatory.

This is in the same family as long straddles, short butterflies etc. You want the stock to go "somewhere" and not say still, otherwise you lose.

This is of course the synthetic of an ordinary short diagonal spread, but if your account qualifies for the new portfolio margin rules it won't make any difference. Otherwise long near month call short deferred call does the same trick for less capital.

Like all strategies, if the risk profile suits your view, fine.

 

[Hopeful]

Thanks a many for your quick and to-the-point analysis.

How did you come up with that risk graph? When I plug in the values for the stock and options I get the usual crank shaft handle shaped collar risk graph like this: _/¯ , but it doesn't take into consideration that the options are in different months.

BTW, the same site has two other PDFs there which improve upon the original - it seems that the CCT one alone had too many flaws.

Wayne, you often advocate simplicity for example by using synthetics instead of actual stocks, but I'd like to collect dividends too. I've narrowed my list down to two possible long-term stocks to hold and protect with options, these are ACH and FRO. Both pay nice big dividends, but only FRO moves enough to consider trading dynamically. Whaddya reckon about my brilliant idea? Arigato.

 

[wayneL]

In Hoadley at the bottom right is a panel of buttons, Press "Individual Trade Analysis"

At the right of the chart are two drop down menus. On the left one select "Net Position". On the right one select "Profit at Analysis Date". This will give you todays payoff diagram.

To get the payoff diagram at the near option expirey, go to the top right and select "Reset Days To Minimum"... and voila

Re dividends: Bear in mind these are generally priced in and accounted for in the price of the option, so it won't make any differnce... unless the company increases div payouts in the future and within the life of the option.

Using synthetic call (stock + long put) there is the issue of cost of "carry as you go" verses cost of carry paid up front in the long call, which may give the synthetic the advantage in certain circumstances. (as discussed earlier in another thread)

My account qualifies for portfolio margin, so I personally would go stock + put now. However if I didn't qualify, I would use long calls. Hope that makes sense.