I have been looking for a good opportunity to review a current trade that involves the use of an Option Collar – and how it is used to protect against a downside move in a long position. Today I bring you LVS (Las Vegas Sands Corp).
I am long the stock in my swing account from last week, playing for the 60 Roll (for the stock to move through 60) from an entry of 59. Once the stock achieved the goal, and was hovering around the 61.5 level, I elected to protect the position by putting on an Option Collar.
Here is how it works:
- I sold the April 65 strike call
- I bought the April 60 strike put
This trade cost $.36 cents (a debit) to put on. Now lets fast forward to now to see where we stand with this Collar:
- The April 60 put last traded at 2.59 (where I sold)
- The April 65 call last traded at .01
So you have the Collar on, what is the plan Stan? A key point to make here is that both of these options expire this Friday. You will need to determine soon when to sell that April 60 Put to get the most value out of it if you leave the long position on (which I am).
So in summary, I am down $1 in the long position but have reaped $2.23 in net gains via selling the Put minus the original debit for the Collar. This means I have $1.23 in wiggle room before the overall trade hits breakeven.
4/18/2012 Update: The stock is seeing a nice bounce and I have done the following with the position:
- Sold 1/4 at 60.20
- Sold 1/4 at 60.06
- Sold bal at 59.7
- Bought back the Short 65 Call at .01
This trade is now closed.