For a trader that utilizes options frequently, there are situations that occur that can cause frustration. Some examples are:
- You own a Straddle and the stock goes sideways until expiration.
- You sell premium that seems so “safe” yet you find yourself fretting over the position and counting the days until expiration, with fingers crossed.
- You own a long position and sell calls against (covered) only to see it run past the short call strike – thus capping your return. Pullback please !!!
There are of course many more scenarios that can be put in this list, but I want to highlight the last one. I had a long position in RAX (Rackspace) and had put on what is called an April 50/55 Collar (short an upside call and buy a downside put). My goal was simple, to protect against a downside move in a way that didn’t require constant management of the position.
I found myself with the price moving up through the short call strike (and beyond) thus capping the gain. Over the course of several weeks, Mr. Price gave me a few chances to “uncover” (buy back the short call) but I elected to let the position run its course.
Due to this, my long position in RAX will be called away as price exceeds the $55 strike price, and the downside put expires worthless.